Understanding Bad Business Credit (and Hacks to Improve It)

Owning a business comes with as many opportunities as it does responsibilities. One is is managing a business credit profile. Business credit is similar to personal credit in that it offers a snapshot of financial strength and ability to responsibly manage debt. Lenders take a close look at business credit when determining if a company is eligible for financing, including small business loans, lines of credit, or business credit cards.

Similar to personal credit scores, businesses have credit scores as well, based on several different factors. However, those factors differ slightly from personal credit, as do the ranges of business credit scores. For instance, personal credit scores generally range from 300 to 850 while business credit scores differ considerably by credit bureau. Businesses may be scored on a scale of 101 to 992, or a scale of 1 to 100.
No matter which score is used, small businesses must understand why business credit matters, how it impacts their business, and how to improve it over time.

Why Is Business Credit Important?

Just like with personal credit, businesses need a strong credit score for better access to affordable financing. Companies with the highest credit scores are more likely to get favorable terms when opening new accounts, such as business credit cards with low interest rates, business lines of credit with high credit limits, or business loans with manageable repayment terms.

On the other hand, a poor credit profile potentially bars businesses from financing. Lenders may be unwilling to establish new accounts for companies that have no or low business credit scores. When an application is approved, low-credit businesses can expect to pay higher interest rates or receive less manageable repayment terms compared to businesses with a high credit score. At the same time, without access to affordable financing, it can be a challenge to keep the doors open during financial emergencies.

Dun & Bradstreet, Equifax, and Experian offer business credit reporting and scoring, so long as a business is a legally registered entity. Each of these credit bureaus offers online access to business credit reports and scores.

How to Improve and Maintain Business Credit

Understanding how to improve business credit starts with understanding how business credit scores are determined. Business credit scores take into account the following:

  • Number of years in business
  • Lines of business credit applied for and established in the last several months (hard inquiries)
  • Any collections or tax liens against the business
  • Payment history to credit accounts

Brand new businesses may be weak in all of these categories and have either no or low credit. For well-established businesses with financial missteps in the past, a low business credit score may be at play. In either case, there are some simple steps you can take to build your business credit.

Business Credit Cards

Business credit can be built with the help of a business credit card. Companies that are registered and have an active bank account can get approved for a business credit card fairly easily. Once a credit card is approved, use it responsibly. Keep the credit utilization ratio relatively low compared to the total credit limit available, and always make payments on time. This credit card activity will help establish and build your business credit score. They are also great tools for picking up various company expenses and running the business.

Business Lines of Credit

Similar to a business credit card, opening up a business line of credit can help improve a business credit score. A line of credit is a flexible financing vehicle that can be used continuously like a credit card, but it often carries a higher credit limit and a potentially lower interest rate. Keeping to the same responsible habits of low credit utilization and on-time payments can help build business credit.

Responsible Business Loan Management

Finally, business loans are not easy to come by when a business has bad credit. However, securing a business loan through an online lender or alternative loan provider may be a better way to build business credit. Low-credit businesses with high revenue may be able to secure a business loan without issues. After taking out a business loan, timely repayment can improve your business credit score.

So, what’s the good news?

Having strong business credit is an important part of running a successful, profitable business.
The good news is that there are several easy ways to build business credit like business credit cards, lines of credit, or business loans. Responsibly managing any of these is key; including debt management through regular, on-time payments. Through diligence, any company with minimal or bad business credit can improve their standing for the better.

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Andrew Rombach is a Content Associate for Lendedu – a website that helps consumers and small business owners with their finances.

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