How to Improve the Credit Rating of Your Business and Why It Matters
Most business owners know their personal credit rating, but research shows that 60% of them do not know their credit rating, but this number is important when it comes to contracting with suppliers and obtaining loans at competitive rates. Here’s what you need to know about establishing a credit rating for your business and how to improve it.
What is a business credit score?
In the same way that your personal credit score determines the state of your personal finances, the credit score of a business reflects the finances of your business. The score determines your creditworthiness and is calculated using credit information from your suppliers and creditors, court documents, and collection agency data.
There are three main business lending agencies – Dun & Bradstreet, Experian and Equifax – and each provides its own estimates and uses different methods to calculate them. In general, however, your business’s credit rating will range from 0 to 100, with 100 being the highest credit score.
These agencies also offer reports that, unlike personal credit ratings, are publicly available to anyone willing to pay for them, including suppliers or potential business partners who may be considering whether or not to do business with you.
These reports will include background information about your company, such as the status of your tax records, the number of employees, the state of ownership, and related banking information, including your history of bankruptcies, foreclosures, liens, and lawsuits. It’s worth noting that lenders can also view your personal credit report, so the two types of credit ratings aren’t entirely different.
The advantage of a high credit rating for a business is that it will help you get larger loans with preferred rates and terms. In fact, according to a 2019 study that cites Nerdwallet , 45% of small business borrowers who receive a “no” from lenders are rejected because of their credit rating .
How to set a credit score for a business
You do not automatically receive a business credit rating just because you started a business. Accounts accumulate over time, although there is no guarantee that this will happen. To ensure that you create a business credit score across all three major bureaus, you need to follow these steps:
- Create your business as a separate legal entity , such as a partnership, cooperative or LLC.
- Open a bank account in the name of the company.
- Get a separate work phone number.
- Get your employer identification number from the IRS.
- Specifically for Dun & Bradstreet, you will also need to apply for a DUNS number , which the agency will use to track your business.
How can you improve the credit rating of your business?
In many ways, improving your business’s credit rating is like improving your personal credit rating. Paying bills, opening lines of credit, and tracking credit report errors (which are unfortunately common) can all help you improve your rating over time. The use of credit or the number of lines of credit your business actually use, as well as the duration of those lines of credit, will also affect your rating.
Unfortunately, maintaining the highest credit rating is costly for your business because, unlike personal credit ratings, business credit reports are not free:
- The cheapest Dun & Bradstreet offering that actually shows you your business’s credit rating is the CreditBuilder Plus product, which costs $ 149 per month (including the DUNS number for your business if you don’t already have one).
- Equifax charges $ 99.95 per report. (You can order here .)
- Experian sells a CreditScore report for $ 39.95 , which includes your business’s credit score at Experian.