Even though the Federal Reserve has been keeping interest rates low since the 2007 financial crisis, that doesn’t mean all business owners are getting a good deal on loans. In many cases, a poor credit score can ruin your access to capital and potentially halt the growth of your business.
However, just like with individuals with bad credit, business owners have plenty of tools at their disposal to raise their company’s credit standing and make borrowing a more affordable option for growth.
David Ehrenberg, founder and CEO of Early Growth Financial Services, has been helping small businesses meet their financial goals since his company took off in 2008. Early Growth Financial Services offers startups and small business a complete suite of outsourced accounting, tax and valuation services.
We sat down with him to find out the five best ways to raise a small business credit score.
1. Understand How a Business Credit Score is Calculated
Here’s a what-if for you — you wake up one day and see your business credit score is an 80. Is that good, bad or right in the middle?
Unlike an individual consumer’s credit score, which ranges from 300 (bad) to 850 (amazing), a business credit score is placed on a zero to 100 scale, with scores of 75 or higher considered the best.
However, the process of calculating a business credit score is a bit more complex than an individual’s.
“For a business credit score, it’s much more looking at the financial history of the company, looking at what their cash burn is, looking at what their financial ratios are on their balance sheet and their capacity to handle debt and credit,” Ehrenberg said.
Credit reporting agencies also may look for negative marks like collections or liens, slow payment history, frequency of credit inquiries and the company’s size/age.
2. Find Out What’s Lowering Your Business Credit Score
“Your first step is to find out why [your score is low],” he said. “What’s driving it? Is it one vendor? A handful of vendors? Is it a bank? Creditor? Who is driving that business score down?”
A good way to do this is to get a copy of your business credit report through companies like Experian, which will have a record of actions that have either improved or penalized your score.
If you’ve had trouble making payments to a vendor or bank on time, for example, “going out and working with that vendor or bank to fix it is the first step.”
3. Put the Right Infrastructure in Place
According to Ehrenberg, it’s best for small business owners to stay on top of their cash flow and put the right processes in place to make sure things don’t get out of hand.
“The biggest thing we talk to our clients about is understanding your cash position,” Ehrenberg said. “Understand your cash flow and your burn (expenditures).”
Once you’ve got a good understanding of how money is moving in and out of your company, you’ll want to make sure your accounts payable department is following the necessary net-10 and net-30 guidelines, staying on top of collections and using a streamlined infrastructure so you won’t any important payments.
“If you have a track record of making payments on time, taking care of your accounts payable in a timely manner, not violating any of the terms of your debt, and you show over a long period of time that you’re a good corporate citizen, that’s going to be the biggest driver for increasing your credit,” he said.
“If you have a track record of making payments on time… that’s going to be the biggest driver for increasing your credit.”
4. Handle Debt Responsibly
Debt only leads to credit score penalties if you handle it irresponsibly. In other words, keep your debts to a manageable level, avoid maxing out your credit utilization ratio and only take on loans that have repayment terms well within your means.
“Not all debt is bad,” Ehrenberg said. “Debt can be very good, especially when you’re talking about a thing like a credit score. Someone who has no credit cards and no debt oftentimes will have a lower credit score than someone who has a lot of debt and does a really good job of paying it.”
It should also go without saying any late payments or accounts sent to collections will send your business’ credit score into a tailspin.
5. Establish a D-U-N-S Number
Established by Dun & Bradstreet Credibility Corp., a D-U-N-S number is a unique nine-digit identifier assigned to your business that helps other companies uncover vital information like your financial reliability, industry classifications, socioeconomic status and much more.
In fact, the federal government, state and local agencies and most Fortune 500 companies require you to have a D-U-N-S number before you can accept work as a supplier, contractor or consultant.
“It’s become one of the de facto pillars for checking business credit,” Ehrenberg said. “Certainly you want to have a good D&B score when you’re talking to a lender.”
Just like a personal credit score, an excellent business credit score doesn’t happen overnight.
As long as you reliably make payments to your vendors, leverage debt appropriately and conduct business as a responsible corporate citizen, you’ll be in good shape.
Photo credits: pdffiller.com,