Business Finance

7 Tips for Cleaning Up Small Business Credit

Jan 26, 2020 • 10+ min read
Small business owner cleaning up her business's credit
Table of Contents

      Vendor credit, loans, and other lines of credit can be essential in helping your business maintain cash flow and keep up with customer demand. Your ability to obtain financing hinges largely on what’s included in your business credit reports.

      These reports tell suppliers, vendors, and lenders how responsible your business is when it comes to borrowing money and repaying it. The more often you pay on time and the less debt you carry, for example, the more favorable the odds are that you’ll qualify for financing.

      When your business credit is less than perfect, improving it belongs at the top of your to-do list. There are several things you can do to clean up your small business credit reports and improve business credit scores. This guide breaks down everything you need to know to work your way toward a better business credit rating.

      Small Business Credit vs. Personal Credit: What’s the Difference?

      It’s important to keep in mind that personal credit and business credit aren’t the same things. Personal credit history is associated with your personal identifying information. Chiefly, that means your Social Security number.

      Personal credit reports are generated by the 3 primary credit reporting agencies: Equifax, Experian, and TransUnion. Information from your personal credit reports regarding loans, credit cards, and other debts in your name is used to calculate your personal credit scores. These credit reports and scores are what lenders look at when you apply for new credit. Landlords, utility companies, and employers can also check your personal credit for screening purposes with your permission.

      Small business credit is different. Your small business credit reports detail financial information related specifically to your business. Instead of using your Social Security number, business credit information is linked to your business’s Employer Identification Number or EIN. Your business credit report includes information related to financial accounts opened in your business’s name.

      It’s important to note that you may use your Social Security number initially to obtain business credit. For example, if you’re applying for a business credit card, the credit card company may ask for your Social Security number, EIN, or both. Once the account is opened, your account activity would be reported to your business credit reports.

      Now that you’re clear on the differences between personal and business credit, here are 7 helpful ways to polish up your small business credit.

      Start with a Thorough Review of Your Credit History

      Before you can address any issues with your business credit, you first need to know what those issues are. That means checking your business credit history.

      There are numerous options for pulling business credit reports, both free and paid. Dun and Bradstreet, for instance, is considered the gold standard for business credit reporting. However, you can also get business credit reports through Equifax and Experian, as well as credit monitoring services such as Nav or Capital One’s Business CreditWise tool.

      What’s important to note is that different business credit reports may contain different information, depending on what’s being reported by your creditors or vendors. When reviewing your reports, check closely to make sure the following types of information are accurate:

      • Your business name and address
      • The Standard Industrial Classification (SIC) code used to identify your business
      • Payment history
      • Creditor or vendor information, including account numbers, balances, and available credit
      • Public records, such as judgments or liens

      When checking your credit reports, it’s important to make sure these items are being reported correctly. Unlike consumer credit reports, business credit reports aren’t covered by the Fair Credit Reporting Act. This means there’s no formal dispute process in place if you find an error on your business credit history. However, Dun and Bradstreet, Equifax, and Experian each have policies in place for business owners to dispute errors or inaccuracies.

      You should also look for any items on your credit report that might be hurting your score, such as late payments or past due accounts. If you have any of these on your business credit, you can move on to step 2.

      Get Past-Due Accounts Up-to-Date

      If your credit report review reveals late or missed payments, make getting those accounts current a priority.

      Reach out to each creditor or vendor that you’re behind with to discuss terms for bringing the account current. If you have multiple accounts to negotiate, consider whether you can work out a payment plan that allows you to make progress with each of them. Alternately, you might want to pay the most delinquent account in full and work out payment agreements for the rest.

      Once your accounts are current, you can re-establish a positive payment history by making on-time payments going forward. While different factors influence your business credit scores, payment history ultimately carries the most weight since creditors and suppliers want to know they can count on you to pay on time.

      You might be wondering if bringing late accounts current will give your business credit score an automatic boost. The short answer is no. Even though the account may no longer be past due, the negative payment history will remain on your credit report. You can, of course, reach out to your creditor to ask them for a courtesy removal of negative marks, but they’re not obligated to honor your request.

      Add Relevant Information to Your Credit Report

      It’s entirely possible that not all of your vendors or creditors report your account history to the business credit bureaus. Or they might report your account to one business credit agency but not the others.

      Making sure that you’re getting proper credit for a pattern of responsible credit use is having all of your accounts listed on your credit history. With Dun and Bradstreet, for instance, you can report any open tradelines even if your vendors don’t report them, which could help with improving your credit history.

      It’s also possible to help your business credit using bills related to expenses other than debt. A reporting service like eCredable, for instance, allows you to submit account history for things like utilities or cell phone services. This information is then transferred to the credit bureaus.

      It’s important to note that services like eCredable may report to smaller credit bureaus, rather than larger companies like Dun and Bradstreet or Equifax. But it can still be a helpful way to improve your small business credit using your payment activity for bills you’d already pay anyway.

      Work on Reducing Credit Utilization

      Getting your payments in on time is the most effective way to clean up small business credit. Second to that, however, is minimizing the amount of revolving debt you’re carrying on credit cards or revolving credit lines.

      Reducing some of what you owe could improve your credit utilization ratio, which in turn can help your credit score. Make a list of each revolving debt owed, including both the current balance and the total credit limit. Then, divide the balance by the credit limit for each one to determine each debt’s credit utilization.

      For example, if you have a small business credit card with a $10,000 limit and you owe $5,000 on it, your credit utilization is 50%. Credit experts typically recommend that for the best credit score results, you keep your credit card utilization at 30% or less.

      Aside from reducing balances on credit cards or lines of credit, there are 2 other strategies you can try to improve credit utilization. The first is to call your credit card companies or log in to your online account and request a higher credit limit. The second is to open an entirely new credit card account.

      Either option could increase your total available credit. Assuming that your balances remain the same, this would help your credit utilization ratio. For example, say that you increased the limit on your card from $10,000 to $15,000 but kept the same $5,000 balance. Your new utilization ratio would be a more favorable 33%.

      The key is not expanding your debt when expanding your credit limit. Doing so would only be counterproductive to your business credit score and potentially add strain to your business cash flow when it’s time to repay it. Something else to keep in mind is that applying for a new business credit card could ding your personal credit rating slightly if you apply using your Social Security number. Each new inquiry for credit can trim a few points off your personal credit score.

      Consider Consolidating Business Debt

      If you have business debts spread across multiple credit cards, loans, or lines of credit, consolidating them could make managing the balance easier while also potentially yielding positive credit results.

      When you consolidate business debt, you’re getting a single loan to pay off your existing balances. You then make payments to that new loan going forward.

      This move can do 2 things for you. First, it can make your debt more manageable. When you have just a single payment to make each month, you reduce the odds of forgetting to make the payment and incurring negative payment history on your credit report. That alone could help your score if you’re able to establish a lengthy track of paying on time.

      The other benefit of consolidating business debts into a single loan is the potential to make your debt less expensive. If the interest rate on a consolidation loan is less than the average combined rate you were paying on your debts, that can translate to savings that you could reinvest elsewhere in your business.

      If you’re considering consolidating business debt, pay attention to the terms different lenders offer. Compare the interest rates, fees, minimum and maximum borrowing limits, funding speed, and the minimum requirements for approval. Ideally, you should be looking for a loan that represents the best combination of favorable terms with a payment that’s realistic for your business cash flow.

      Separate Personal and Business Spending

      When you have a sole proprietorship or a small business with just a few employees, it may be tempting to use business and personal credit interchangeably, but this can be a mistake. Mingling expenses and debts can result in a negative impact on both your business and personal credit histories if you miss payments or max out credit cards.

      If you use credit cards to fund your business, stick with business credit cards for those expenses. Avoid charging personal expenses to business cards or business expenses to personal cards. This practice can simplify things when it’s time to separate deductible business expenses for tax reporting purposes, and it can keep your personal credit activity from impacting your business credit history—and vice versa.

      Just keep in mind that separating business and personal debts doesn’t necessarily separate your liability. If you open a business credit card or take out a business loan that requires a personal guarantee, you can be held personally responsible for the debt if your business defaults on the payments. A defaulted credit card or loan account could then be reported to your personal credit history.

      Monitor Your Business Credit Regularly

      The last tip for cleaning up business credit is simple: keep an eye on your credit history.

      When you’re continuously monitoring your credit, problems like errors or potentially fraudulent accounts are less likely to hurt your score since you can address them before any real damage is done.

      The easiest way to monitor business credit may be using a free service. Remember to read the fine print to understand what type of services you’re receiving and how your business and personal information is being accessed before entering into an agreement for free or paid credit monitoring.

      Why Your Small Business Credit Matters

      One of the most important reasons to take care of your business credit is financing.

      In an ideal world, you may never need a loan or credit card—your business finances are sustained entirely by your cash flow. But that’s not always realistic.

      If you’re planning to expand your business or purchase an expensive piece of equipment, for instance, you may not have the cash on hand to cover those costs. Or, if you operate a seasonal business, your cash flow may experience ebbs and peaks throughout the year.

      In those scenarios, financing can help you maintain business as usual and continue pursuing growth opportunities. While your credit isn’t the only thing lenders consider when applying for a loan, line of credit, or business credit card, it is something that comes under scrutiny.

      If you have poor business credit, that could limit your financing options. For instance, you may have to use short-term financing methods, such as a merchant cash advance or invoice factoring, to meet capital needs. While those options are convenient, they can also be more expensive than other types of financing, such as an SBA loan or a term loan.

      Your business credit can also impact other credit scenarios with your suppliers. If you have a good credit score and you’ve always made reliable payments on vendor tradelines, then you may be able to renegotiate better credit terms. On the other hand, a poor credit history could make vendors reluctant to extend credit to you at all. That could make it difficult to get the supplies or materials you need, which in turn makes serving your customers more challenging.

      Building Business Credit History from Scratch

      Having limited or no business credit history is a situation you might be in if you have a newer business. In that case, some of the tips included here may not be as effective for helping to clean up your credit.

      You can, however, take other approaches to create a positive business credit history. Here are some of the simplest ways to get started with building credit for your business:

      • Apply for an EIN if you haven’t already
      • Register for a DUNS number with Dun and Bradstreet, which is used to establish your business credit profile
      • Open a small business credit card
      • Automate your business’s monthly bill payments
      • Apply for vendor credit
      • Consider a small business loan

      One last tip to know about business credit—your information is available to the public. Anyone can look up your business credit file.

      That’s yet another motivator to work on cleaning up any past credit mistakes, since potential customers, vendors, or business partners may take a peek at your credit history. The more effort you put into improving business credit, the bigger your potential return when it comes to your bottom line.

      About the author
      Rebecca Lake

      Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.

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