A credit score is one of the most critical aspects of your financial health. It explains to lenders how responsible you are in using your credit, and a good credit score can help you get new loans or new credit at lower interest rates. Hence, building a solid business credit score can help you get credits for your new business ventures and projects. 

If you want to improve your credit score, we can share some factors on which businesses credit scores are dependent on. Once you start making these changes in your financial health, you will slowly observe improvements in your credit scores. 

Remember that just like your personal credit score, building a business credit score can help you attract new investors to your business, making it credible in the long run. Let’s dive into understanding the business credit score in detail.

Business Credit Score 

Here we have listed some basic questions that might occur in your mind as a business in order to understand good credit scores for your business. Let’s find out.

What is a business credit score?

It is a number that indicates whether the business is eligible enough to get a loan or become a business customer. In simpler words, a business credit score applies to a business which describes the business’s financial health through the business credit report, which includes the business name, number of employees in the company, past data of the business, account information and owner details. 

Why is a credit score important for your business? 

A credit score is important for your business because building a higher credit score can help you get new investors and loans at low-interest rates. A good credit score can allow you to separate your personal finances from your business finances without relying on your personal credit. Further, it will be helpful when you file your taxes in the US. Also a good business credit score can also help you get insurance at lower rates. 

How do personal credit scores and business credit scores differ?

There are many differences between the personal credit score and the business credit score, and below are some of them:

  • The business credit score is determined using factors such as business credit history, debt, loan repayment details, industry risk, and the company’s size. Personal credit scores are determined by payment history, new credit, debt amount, and length of credit.
  • Anyone can check business credit scores, whereas private credit scores can only be accessed in specific situations.
  • Business credit scores are determined using the EIN (Employee Identification Number), while your personal credit score is determined using the Social Security Number. However, you can generate the EIN only if you are a legally registered business

Factors affecting business credit scores

The most apparent factors affecting business credit scores are payment history, length of credit history, credit utilization, types of credit used, recent credit inquiries, and many more. Let’s have a detailed look at the factors affecting business credit scores.

Payment History of the Business

The business’s payment history is the most valuable factor when calculating business credit scores because it accounts for over 35 percent of the score. Some businesses do not perform their repayments, which badly impacts their credit scores. Therefore, it is necessary to check the business’s payment history to understand whether the business’s credit score is positive and well maintained.. 

Duration of Credit History

The lending banks and financial institutions look closely at the business’s credit history to see how the business could provide repayments at regular intervals. This is a significant factor in maintaining a business credit score, as it defines the prospective owner as capable of handling the credit responsibly. Therefore, becoming credit active and borrowing regularly can significantly help improve credit scores, but only if the repayments are performed on time. 

Utilization of Credit

Credit utilization takes up at least 30% of the credit score. A higher credit utilization rate for a borrower shows that the business has significant spending habits, affecting the business credit score. Therefore, lenders consider high credit utilization irresponsible and risky in managing financial credit scores and avoid investing in them.

Types of Credit

A diverse credit profile in the business portfolio makes it look promising enough to get credit from lenders. Therefore, a mix of various secured and unsecured loans helps build the trust of the lenders to provide credit. 

Frequent Credit Inquiries

Frequent credit inquiries in a short span of time can reduce a business’s credit score, as lenders can check when and how the business has applied for loans. All the hard inquiries are available on your credit report, and having too many credit inquiries for a loan can affect your financial portfolio.

Remember, the credit scores do not change if the business inquires about their credit scores because they are known as soft and harmless inquiries. 

No Unfavorable Public Records

Unfavourable matters on public records can affect the business’s credit score, such as legal judgments, filings related to bankruptcy, misinformation, etc. These public records can affect your credit score and make it difficult to get loans.

Adverse public records can affect a business for several years, depending on the nature of the issue. For instance, bankruptcies can be visible for seven to eight years on the credit report, whereas unpaid debt can remain forever. 

Best Practices for Building and Maintaining a Solid Credit Score 

Besides understanding what affects credit scores, knowing how to build and maintain a credit score is essential. Here we have listed some best practices for building and maintaining a solid credit score. 

Establishing a business credit profile

You must be aware that companies tally most credit scores. One of them is FICO (Fair Isaac Corporation), an analytical software company that develops the original credit score, popularly known as FICO scores. The best credit scores range from 300 to 850, and it is also considered that the higher the credit score, the greater the creditworthiness. 

Paying bills and obligations on time 

The business credit score varies if you don’t pay your bills on time. Recent late payments affect your business credit score more than past late payments. If you miss your payment one or two times, it may affect your credit score. 

The best way to pay bills on time is to set up automatic payments or have an alert informing you on time.

Monitoring credit reports for errors and discrepancies 

It is important to monitor your credit reports to maintain your business credit score and avoid any errors or discrepancies. Sometimes, you might have some errors on your credit report, affecting your overall credit score and leading to problems getting loans and other benefits. For instance, you must keep track of your account openings and get your NOC from the financial institution when your loan is completed. 

Maintaining a healthy credit utilization ratio

To maintain a healthy credit utilization ratio, you must keep track of how much money you owe for loans and how much money you have already paid. If your business makes payments on time, the credit score will emphasize the remaining amount. Therefore, the lower the credit utilization ratio, the higher the business credit score. 

Building relationships with creditors and suppliers

A trustworthy lender can provide you with a loan on time, and building good relationships with creditors and suppliers will benefit you in all ways. Failing to build good relationships with suppliers can create insurmountable risks and debt, with the threat of liquidation.

Regularly reviewing and updating business information with credit bureaus

When you plan to improve your credit score, it will likely not happen overnight. Therefore, you have to take small steps by regularly reviewing and updating business information with credit bureaus. In this manner, you will gain trust, and your business credit portfolio will look impressive. You can review your credit card report from the credit bureaus and evaluate your improvement. 

Additional Tips for Managing Business Credit 

For more insightful information on making good credit scores for businesses, we are sharing some additional tips for managing business credit. Let’s take a look at them.

Separating personal and business finances 

You must separate personal and business finances because it is easier to keep track of taxes for separate business accounts, which will help you file taxes. Also, it would be best if you separated your personal liabilities from your business finances for personal security. For instance, you must not put personal property on lease because it may harm your security if you cannot repay the mortgage.

Maintaining accurate financial records and documentation

You must use a digital platform to maintain accurate financial records and documentation for your business. A good credit score for businesses depends on the financial records submitted to the financial institution, which are free from missed payments and have a healthy financial status. 

Communicating with creditors and lenders proactively

The other way to maintain your business credit is by becoming proactive and communicative with your creditors and lenders. If someone has invested in your business, let them know your progress, which will help them gain trust in your business. 

Continuously monitoring and evaluating credit performance.

Once you have improved your credit score, you must check your credit history and performance. Take out a copy of your credit reports from the national credit bureaus, which are Equifax, Experian, and TransUnion. Then, you must evaluate the report and check for improvement.

Improving your credit scores is a consistent and long term process, considering all the factors. To improve your credit score, you must consider factors including timely payments, a mix of different credit cards, loan payments, minimal inquiries on new credit, etc., to have a positive impact on your credit report. Therefore, by following the above tips, you can have good credit scores for your business.

Experience Seamless and Secure Business Account Opening with Cheqly – Get Started Now! 

We hope that in this article, you get to know all the insights for building a solid credit score for your business. You can check your credit reports on a regular basis by getting a free copy of each report from the major bureaus every 12 months. Thus, review your business credit report and improve your credit profile.

Do you want to experience seamless and secure business account openings? Then you are at the right place because Cheqly is here to help you. Get started now!

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