Nearly every small business needs access to capital to keep operations running smoothly and achieve growth. In fact, National Small Business Association data shows more than 70 percent of small businesses seek financing. Unfortunately, of those in business 2+ years that apply, more than a third get denied for a small business loan. A big reason? They have a low business credit score.
A strong business credit score helps demonstrate your business’s creditworthiness to potential lenders. It proves your ability to effectively manage money and sustain a positive cash flow. To increase your chances of a loan approval, here are four ways you can improve your business credit score:
Business owners and individuals tend to check their credit reports only when they’re in need of a loan. But one way to improve and maintain your business credit score is to regularly review your reports for errors. Getting into this habit can ensure minor errors don’t adversely affect it.
Did you recently pay off your balance for a new equipment purchase? If the payment isn’t mirrored on your report, chances are a clerical error may be to blame. If the information in your report is inaccurate or out of date, you need to file a dispute through the credit reporting agency’s website.
The three major business credit bureaus include FICO Small Business Scoring Service (SBSS), Dun and Bradstreet (D&B) PAYDEX, and Experian Intelliscore. A business credit score is based on your business’s history of payments to suppliers and lenders. However, it can also be impacted by the industry you operate in, the size of your business, and your revenue. Each bureau uses its own metrics and data points for determining your creditworthiness and has slightly different ways of reporting and resolving a dispute.
Debt doesn’t always lower your score, but it can if your debt financing ratio is too high. There are several ways to effectively pay down business debt, including eliminating excess costs, restructuring debts through a third party, and formulating a payback plan. Additionally, you should always be aware of your current financial situation and adjust your budget for unexpected changes in cash flow. Keeping your debt levels low will improve your business credit score and allow lenders to see that you’re in control of what you owe and can pay off expenses before the due date. The lower your debt, the less risky lending to you may seem.
Lenders also look at the amount of credit that you can use and prefer a lower credit utilization ratio. To raise your available funds while lowering your ratio, get into the habit of paying off all your bills in a timely manner, ideally before they’re due. Also, aim to use your business credit cards on a regular basis. By consistently using your cards, holding a reasonably low balance, and then paying all creditors on time, your business credit score should improve.
While it’s important to spend time building your brand and generating sales, you need to maintain the amount of money moving in and out of your business. Positive cash flow is an indication that your business has the working capital needed to settle debts, pay expenses, and cover unforeseen expenses. Additionally, if you run out of money, you’ll likely miss payment deadlines and your credit score will get dinged. According to the U.S. Small Business Administration, a lack of steady cash flow is the No.1 reason for business failure.
Keeping your business credit score healthy will make it easier to secure financing in the future.
If you find yourself with a less-than-stellar business credit score, but need immediate working capital, an alternative lender can help. From bad credit loans to other types of funding, there are options that can provide needed funds, while also giving you the chance to repair your business credit score in the process. And unlike accessing capital through traditional banks, applying is easy, decisions are quick, and funding is fast.
Building a strong business credit score is one of the most important things you can do as a small business owner. Consider how a working capital loan can help.