Having a good business credit score is key to getting business loans on favorable terms today.
Yet, a surprising number of small business owners don’t think about business credit scores — until it comes time to get financing to expand the business or address some other need.
According to Tom Green, Vice President of New Business Initiatives at Lending Club, poor credit scores are one of the top reasons that entrepreneurs get turned down for business loans.
Here are seven steps to improve your business credit score, so you can get the most favorable business loan decisions possible:
Step 1. Establish a (Separate) Business Entity
According to U.S. government figures, over 70 percent of small businesses operate as sole proprietorships. The owners don’t incorporate the business or register a limited liability company.
The result? In a lender’s eyes, the business may not appear to be separate and apart from the owner.
Make sure your business is perceived as having a separate identity. Also make sure your business information can be publicly validated.
Experian, one of the largest credit reporting agencies, recommends actions such as incorporating or forming an LLC (limited liability company), obtaining a Federal Employer Identification Number, opening a bank account in the business name, and setting up a business phone line and listing it publicly.
Step 2. Develop a Credit History for the Business
Next you need to establish a credit history for your business.
Experts suggest starting with applying for a business credit card.
“It’s much easier to get a business credit card than a six-figure business loan out of the gate. Think of the credit card as laying the foundation for establishing a positive payment history, enabling you to qualify for more credit down the road,” says Lending Club’s Green.
Once you get the business credit card, use it. And pay promptly. “Paying your credit card bills on time, or better yet ahead of time, is essential to building a good business credit history,” he adds.
Establishing a positive record with companies you do business with, such as suppliers and leasing companies, may also help. Your history with them counts toward your credit score, provided they report the information to credit agencies.
Step 3. Don’t Neglect Your Personal Credit Score
For most small businesses with under 20 employees, a lender will look at both the business credit and personal credit scores, notes Experian.
That’s because a business of this size is closely aligned with the business owner’s financial situation, as Professor Scott Shane writes.
Use one of the many credit score analyzer tools available today to see how lenders view your personal creditworthiness. Follow any recommendations to improve your score.
Step 4. Choose Lenders Strategically
The right kind of credit can help you build a better credit history so you can qualify for future loans on better terms such as a lower interest rate.
Certain types of financing won’t help with that.
For example, merchant cash advance providers and other alternative lenders typically do not report to credit bureaus. So they do not help your business become more qualified for lower-cost financing in the future.
Borrow from a lender that can help you achieve your business’s strategic goals — not just meet your near-term money needs.
Luckily, with today’s online lending platforms, you have access to one-stop shops for applying to multiple lenders.
“When choosing a lending marketplace online, be sure to also look at the level of personal service available,” advises Green. “For instance, at our company, Lending Club, every business loan client is assigned a dedicated Client Advisor. That’s because we know that while technology saves you time, it also helps to have a human being who can deeply understand your financing reasons and make recommendations to achieve your goals.”
Step 5. Keep Credit Card Balances Low
Don’t max out your credit cards, experts recommend.
The higher your outstanding balances owed on credit cards or lines of credit, the lower your credit score is likely to be.
Credit Karma recommends keeping the amount of credit you’ve used to around 30 percent or less. You can figure out this percentage by dividing your total credit card balances by your total card limits. For example, if your total credit card limits are $27,000, and you owe balances of $7,300, the amount of credit you’ve used would be at 27 percent:
$7,300 divided by $27,000 equals 27 percent
While the above guideline was based on consumer accounts, remember, for most small businesses, your consumer credit score is a factor in business credit decisions.
And according to Experian, this measurement is also a factor in business credit scores.
Step 6. Monitor Your Business Credit — And Fix Mistakes
Mistakes happen — and they seem to happen more frequently on business credit reports than on personal credit reports. “Something as simple as an incorrect SIC code (used to classify your business industry-type) can lower your credit score,” writes Levi King, founder of Creditera, a credit monitoring service. (SIC is now called NAICS.)
Be sure to check for mistakes and get them fixed before applying for financing. Check these major business-credit reporting sources: Experian, Equifax, TransUnion and Dun & Bradstreet.
Step 7. Don’t Unintentionally Damage Your Score
Last, but not least, don’t unintentionally damage your business credit score.
Before taking any credit action or applying anywhere, always ask whether accessing your credit history will be a “hard pull” or “soft pull.”
Both types of credit inquiries enable a third party, such as a lender, to view credit information. However, only a hard pull can negatively affect your credit score.
Hard pulls generally occur when a lender checks your credit report after you apply for a loan or credit card. “A lot of recent credit application inquiries in the form of hard pulls could be a red flag to a lender,” says Green. “They may suggest a desperate need for credit or that you were turned down by multiple lenders.”
Soft pulls are when a company checks your credit report as part of, say, an employer background check or getting “pre-approved” for credit card offers.
“We know the difference between hard pulls and soft pulls matters. That’s why we say right on our website at LendingClub.com that getting a free online quote from us won’t affect your credit score,” adds Green.
These seven steps will help you develop a strong business credit score and get the financing you need to expand, hire new people, even out cash flow dips, buy new equipment and otherwise operate and grow your business.
Knowledge is power. And knowledge about your business credit score is financial power.
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