Are you a small-business owner who's not getting the love you need from lenders? Are suppliers insisting on terms you find downright unfriendly?
The common denominator may be a poor business credit score. Here are some steps you can take to fix it.
What goes into your business credit score?
Just like a personal credit score, a business credit score measures the level of risk you pose for a lender. Unlike personal credit scores, most of which adhere to the FICO model, business credit scores don't follow an industry standard.
The three major bureaus — Dun & Bradstreet, Equifax and Experian — use different methods to compile and monitor business credit scores. Each calculates its scores according to different criteria and uses different number ranges. Here's an overview:
- Dun & Bradstreet uses a proprietary Paydex score that is based on payment data. You can develop a respectable score by establishing credit with suppliers you are likely to have an ongoing relationship with. That way, you can build and maintain credit, assuming you pay your suppliers on time — and the earlier the better, as the highest rating is reserved for businesses that pay 30 days earlier than terms demand.
- Equifax uses three assessments to rate businesses: a payment index examines your payment history, a credit risk score evaluates the likelihood your business will become severely delinquent, and a business failure score measures the chance your business will close.
- In addition to examining credit history, Experian calculates its score by checking public records for liens, judgments and bankruptcies. It also considers demographic information, including how long you've been in business, the kind of business you're in and the size of your business.
Unlike a personal credit report, which you can get for free, you have to pay between $35 and $100 to see your company's credit report. It's worth it, though, to see if you need to take steps to improve your score.
Manage your business credit score
Regardless of a particular bureau's approach, you can take steps to beef up your business's score.
- Establish a business credit history. You probably had to start your business using personal funds and credit. As soon as you can, separate your business expenses from your personal finances. Open a commercial bank account and put your company's bills and account in the company's name.
- Pay your bills on time. This is the most important thing you can do to boost your score. It's the best way to prove you are not a risk to lenders or vendors.
- Understand all the factors in your score. Payment history is not all that matters. Much more is involved, including the age, size and type of the business and how close to your credit limit you are.
- Make sure the information in the credit reports is accurate. Monitor your reports, checking for and addressing errors and updating information as your business develops, because changes in things such as your company's location, staff size and revenue can affect your score.
- Examine the credit of your customers and vendors. The more creditworthy the people you do business with, the more smoothly your business will run and the less likely some problem with an account will ripple through and end up dinging your score.
Taking steps now to improve your business credit score is a smart idea. The better your company's credit, the more favorable terms you're likely to get from vendors and lenders. And should you face hard times, it can be tough to get small-business loans with bad credit.
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