Business owners can have a tough time getting financing even under the best circumstances. Large banks approved less than 1/3 of small business loan applications during the first half of 2019, and small banks approved 1/2, according to Biz2Credit, which suggests there’s lots of competition for limited amounts of capital.
Competing successfully for financing requires good credit, and that presents an additional set of challenges for many small business owners. If you’re one of them, it’s time to take a hard look at the 4 common ways you might be ruining your business credit—and just as importantly, how to get back on track.
The 3 major commercial credit bureaus are Dun & Bradstreet, Equifax, and Experian, and although you probably can’t get copies of all 3 credit reports for free, the reports are well worth the cost.
Once you’ve got them in hand, check to make sure the listed accounts are yours and the information for each is accurate and up-to-date. Also, confirm that the reports show the correct age of your business. Errors in any of these areas can cause a lender to reject your application.
In the event you find an error in one or more of your credit reports, contact the credit bureau(s) and follow the instructions for getting it corrected. Then sign up for a free credit monitoring service that reports changes to your file so that you can catch any future problems early when they’re easiest to fix.
It takes credit to get credit, so you’re not doing your business credit score any favors by relying on your personal money to fund your company.
If you haven’t already, start by opening a business checking account, and then use that account for all of your business expenses. You’ll get double benefits from this action—in addition to getting your Employer Identification Number out there, you’ll also make bookkeeping much easier.
And then apply for a business card. Or, if you already have one, use it regularly, even if only for recurring business expenses.
The more trade or credit lines you have registered in your business’s name, the better. Your vendors and suppliers can help you in that regard, even if they don’t report your account to the credit bureaus. Dun & Bradstreet, for example, lets you add tradelines manually, using its CreditBuilder product. Just submit creditors like your accountant, attorney, advertising and marketing partners, product suppliers, delivery services, and the like, and Dun & Bradstreet will contact them to verify the information it needs.
Using too much credit can be as damaging as not using enough, even if you pay your bills on time and even if you pay your credit card balances in full each month.
Credit utilization is one of several factors credit bureaus consider when calculating your credit score, and it is measured according to your average daily balance. Ideally, you’ll keep yours to no more than 30% of your available credit.
That’s not to say you can’t ever charge more. You can. But pay it down to 30% or less before your statement date, when creditors typically report to the bureaus, so the average daily balance is based on a lower amount.
The other problem with using too much credit stems from the applications themselves. Every time you apply, the creditor makes a credit inquiry. Inquiries reduce your score slightly in the short term, and too many can give the appearance that you’re cash-strapped. It’s best to anticipate your needs in advance and submit all of your credit applications at the same time when you’re shopping for the best rates and terms.
With personal credit, a late payment typically doesn’t show up on your credit report unless you pay 30 days late—not so with business credit.
Your vendors and suppliers give you a certain amount of time to pay your bill — usually 15 or 30 days. Pay on day 16 or 31, and you’re late, which will be reported officially as late to the credit bureaus.
Before you miss a payment, contact the creditor to let them know you’ll be late and ask that they not report the overdue payment. If you have a good record of on-time payments and can negotiate a new due date, chances are they’ll let you slide.
About the only thing harder than building good credit is maintaining good credit. But with time, attention, and good business practices, you can improve your business credit score and be well on your way to qualifying for the financing you need—be it a startup business loan or a business line of credit—to operate and expand your business.