Guest post by Richard Gray
You’ve probably had your personal credit affect your ability to obtain credit—whether it helped or hindered—but have you spent much time considering your business credit score? You might know some principles for getting and keeping your personal credit score up and there are some principles that may also help your business. Businesses’ credit scores play a key role in securing financing. Do you know what your business’s credit score is? I’ve mentioned before some of the benefits to growing or starting your business now, and preparing for a loan by improving your credit score is a good start. Even if you don’t anticipate needing a loan for a few years, start now. It may take time to build credit.
If you’re one of the many business owners that recently chose Utah as a spot to start—since we’ve had some good attention about our business-friendly state—you probably haven’t had time to build up an adequate credit score. Or perhaps the recession hit your business hard, and you need to rebuild. Regardless, these are some ways to build credit so you’ll be ready when your business is ready to grow.
Analyze current credit reports. Request your business’s credit reports from various credit bureaus and pay attention to items that are poorly rated. Negative items may be due to mistakes, fraud, identity theft or outdated information. Work with credit bureaus to correct false information. If the negatives are accurate, be aware that they can stay on your credit report for up to seven years.
Scores are given by business credit bureaus, including Dun & Bradstreet, Business Credit USA, Experian Business and Equifax Business. Business credit scores range from 0-100 with 75 or higher considered an excellent rating. Scores are based on many factors, including whether or not bills are paid on time, the amount of available credit on bank lines of credit and credit cards, the length of time you’ve had a credit profile and the number of inquiries made on your credit profile.
Separate your business and personal scores. Sole proprietors or those in a partnership may have their personal credit information on their business credit report, and vice versa. Forming a corporation or LLC allows business and personal profiles to remain separate. If doing so doesn’t make sense for you, be sure to improve your personal credit score if necessary.
Pay off credit card balances. The percentage of people in the U.S. who carry a credit card balance is decreasing, which may be good for the long-term health of the economy and for those who have paid off balances. Experian states that decreasing the balance on your business credit cards can have an immediate impact on your business’s credit rating. If you must keep a balance, make sure it is less than 30 percent of your credit limit.
Increase capital and assets. Credit is determined using a complex algorithm, a key part of which is how much worth your business has compared to its debt. By building up your assets and capital, you weight the ratio in your favor.
Build credit before you need it. Begin building a business credit history by getting and using a business credit card. (Do not open too many credit cards, however, as this can decrease your score.) Once you’ve established a payment history, consider requesting an increase on your credit limit, even if you don’t need it. Once a higher limit is granted, don’t utilize it. Instead, keep a healthy credit-to-debt ratio that doesn’t push your balance too close to your credit limit.
Request credit-lending companies to report. Credit bureaus create business credit reports with information provided by creditors. The problem is that creditors are not required to send in such information. When a lender extends credit to your business, ask that they report your payment history to credit bureaus. The more vendors that report a positive credit history to the agencies, the higher your business credit rating will be.
Add credit references. One way to do this is to set up a profile with a credit score company. For example, you can set up a profile with Dun & Bradstreet, for a fee. You can then add credit references, such as suppliers you’ve worked with, to support your business’s credit profile. Additionally, having a relationship with your lenders or creditors may make it easier for them to provide details about your track record with payments on loans, which brings me to my next tip.
Build relationships with your lenders. Get to know the employees—particularly the loan officers and managers—at your financial institution. Community banks are an especially good place to get to know your banker, as their lenders often have a say in loan decisions made by local approval boards.
Richard Gray is senior vice president of SBA lending at Bank of American Fork, Utah’s community bank leader, an Equal Housing Lender and Member FDIC. Richard also manages the bank’s Murray branch, and he has assisted local small businesses in obtaining SBA funding for more than 25 years. He served on the board of directors for nonprofit Kostopolus Dream Foundation and was the chairman for nonprofit Utah Microenterprise Loan Fund, Salt Lake City.