Building a Strong Credit Score for Your Business

In this exciting era of business-building, countless entrepreneurs are making their mark on the American economy. There was a remarkable surge in new business openings across the United States in 2022, with an all-time high of 637,590 businesses opening their doors. 

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From home and local services to the hospitality and travel industries, entrepreneurs have embraced the opportunity to pursue their dreams and contribute to their local communities. If you find yourself among this inspiring group of business builders, it's vital to avoid a common mistake that many new entrepreneurs make: mixing personal and business finances. 

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Perhaps you initially started your business as a side project, unsure if it would take off, or you chose to manage business funds through your personal accounts to keep things simple. While these situations are relatable, it's essential to recognize the importance of establishing a strong credit score for your small business. 

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As your business grows and thrives, a solid credit score will become invaluable, opening doors to financing options, favorable credit terms and fueling your continued success.

Understanding Credit Scores

Your business credit score directly impacts your ability to secure financing, insurance rates, and favorable credit terms. While a personal credit score is linked to an individual's social security number, a business credit score is connected to a business employee identification number (EIN).

The Role of Credit Bureaus 

Credit bureaus and the FICO score play a significant role in assessing your business's creditworthiness. Understanding how they operate can provide valuable insights into managing your business credit effectively.

Three main credit bureaus collect and maintain credit information for businesses: 

• Equifax: Equifax focuses on scores that assess a business's creditworthiness. They offer products like credit reports, credit risk scores, and business failure scores. 
• Experian: Experian provides insight into a business's financial health and the likelihood of making timely payments. Their scoring model takes factors like payment behavior and delinquent accounts into consideration. 
• Dun & Bradstreet: Dun & Bradstreet uses the PAYDEX scoring model, which measures payment history and the Failure Score. This score predicts the likelihood of a business ceasing operations.
• FICO: While Fico isn't technically a credit bureau, it generates the FICO Small Business Scoring Service Credit Score. Lenders commonly use this score for Small Business Association (SBA) loans. This score ranges from 0 to 300 and requires a minimum score of 155 to qualify for an SBA loan. 

The general business credit score ranges from 1 to 100, but the score range may differ slightly depending on the bureau.  

Factors that Impact Credit Scores for SMBs

Several factors come into play when it comes to your business credit score. Here is a brief overview of the elements that impact credit scores for small businesses: 

• Business payment history: Timely payments demonstrate your business's reliability and financial discipline. 
• Credit utilization: Businesses that maintain a credit utilization ratio of 30% or less will have more favorable credit scores 
• Length of credit history: Small businesses with a positive track record of managing credit over time will have better credit scores than those without. 
• Amount of credit inquiries: Limiting the number of credit applications within a short period will result in better credit scores. 

Importance of Separating Personal and Business Finances

Keeping your personal and business finances separate is crucial for small business owners. You can track expenses, revenue, and profits more accurately. Since entrepreneurs are constantly looking for tax breaks, separating finances allows you to take advantage of tax deductions and write-offs only offered to businesses.

Building a Positive Payment History

A positive payment history is important in building and maintaining good business credit. Here are some strategies for making timely payments for your business obligations:

• Create a payment calendar: Keep track of your payment obligations in a payment calendar. Include due dates, payment amounts, and information to ensure you make payments promptly. 
• Negotiate favorable payment terms: If you're struggling to make timely payments, reach out to your creditors and negotiate more favorable payment terms. This may include things like extended payment deadlines or temporarily reduced payment amounts. 
• Establish and maintain vendor credit: Work with vendors who offer vendor credit and report back to credit bureaus. Establishing positive relationships will help you build a positive relationship and increase the overall creditworthiness of your business. 

Managing and Reducing Debt

Debt is a natural occurrence for small businesses. However, more debt than you can handle can affect the creditworthiness of your business. We've put together a few strategies for managing business debt effectively:

1. Prioritize high-interest debt: Focus on eliminating your high-interest debt first while making minimum payments on other debt. 
2. Avoid new debt: Minimize taking on new debt while you manage your existing debt obligations.
3. Consider debt consolidation: Explore the consolidation of multiple debts into a single loan with more favorable repayment terms. 

Consolidation options for existing business loans

• Business debt consolidation loans
• SBA loans
• Balance transfer credit cards

Utilizing Available Credit

Responsible credit utilization is key to building and maintaining a strong credit profile. We recommend that you keep your credit utilization ratio below 30%. Regularly review your balances and make efforts to pay them down to reduce the ratio. 

Consider requesting credit limit increases to keep your utilization ratio low. In addition, keep unused accounts open to impact your credit history and utilization ratio positively. Instead of rushing to close unused accounts, leave them open with little to no balance. 

Monitoring and Reviewing Your Credit Report

With all your hard work to achieve a strong credit score, you'll want to stay on top of your credit reports. According to a Wall Street Journal survey, 25 percent of small business owners who checked their business credit reports found errors that put them in a riskier category. These mistakes can lead to lenders rejecting your financing application, forcing you to pay suppliers cash on delivery for inventory, or even paying higher insurance rates.

Tips for monitoring your business credit score

Here are a few tips to help you stay on top of your business credit score:

• Review your company's credit file for completeness and accuracy: Make sure all the information in your credit file is up-to-date and accurate. 
• Monitor your report regularly and sign up for alerts: This can warn you of changes that could indicate fraudulent use of your business credit information. 
• Work with lenders, suppliers, and creditors who report your payment history to the credit bureaus: This can help you build a strong credit history. 

It's essential to dispute any incorrect information on your business credit reports. While business credit reports aren't protected by the Fair Credit Reporting Act (FCRA), credit reporting bureaus are committed to maintaining accurate data. They have procedures to address valid disputes and rectify verifiable errors.

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Developing and maintaining a strong credit score is a key part of the long-term success of your small business. A solid credit profile can open doors to favorable loan terms, various credit options, and several growth opportunities. 

Aion understands the importance of managing your business's financial health effectively. Our all-in-one platform offers a range of solutions to help you easily streamline your business finances, manage credit, and schedule payments. 

See how Aion can help you empower your business with the tools you need to thrive and grow.