Most lenders use the FICO small business scoring service to establish a credit rating for a small business that is asking to borrow cash.
If you are running a small business, it is important that you understand how this score works and how things that you do can have an influence on your credit score.
Remember, the better your score, the better your chance of being able to benefit from decent interest rates.
Why you should manage your small business credit score
Every business out there will need to borrow money from time to time, even the largest companies.
If you borrow correctly, you may end up saving cash in the long run.
After all, why should you dip into your savings when you can benefit from a low interest rate?
What elements dictate your credit score?
Your credit score will be dictated by very much the same elements that apply to your personal credit score.
These will not have an impact on your credit score:
- The reason why you need the money
- Whether the income for your company is predictable
- Your personal credit history
Different credit rating agencies, different scores
There are a few different credit rating agencies out there.
Each of them will have a different scoring system.
Most lenders will use FICO, however.
The First Step to Managing Your Credit History
Before you even think of looking into ways in which you can improve your small business credit history, you first need to consider whether a credit file related to your company currently exists.
The best way to do that is through Dun & Bradstreet.
If it does not exist, then you can follow the process to create one.
Establishing a credit history
To kick-start your credit report, you would need to build your credit history.
This means starting to put things through in the name of your business.
This means rent, utilities and any credit cards that you may have.
If you do not have one yet, then make sure that you open up a commercial bank account!
Make payments on time
There are some elements which will have a huge impact on your credit score.
None of them are more important than the ability to make payments on time.
So, do that!
Pay a couple of days early if you can.
Even if you miss just a couple of payments, they are going to stay on your record for up to seven years.
This means they will be impacting your credit score for seven years.
It will not be good later down the line.
Check your credit report regularly
You will be surprised at how many issues can creep into your credit report.
It is, therefore, important that you correct them as soon as possible.
This means regularly checking your report for incorrect information, misreporting of late payments, etc.
While this chart is based on personal credit reports, this information does apply to small businesses too.
If you have a close look, there is the potential for the existence of massive errors in your report which will drastically reduce your chances of obtaining credit.
Keep an eye on the credit of your customers
This is important.
It can be tempting to extend credit to your clients from time to time.
However, if you do this, you would need to at least check that they have the ability to pay it back on time.
Or at least you have to limit the amount that you need to lend.
You need to realize that if your customers miss their payments, you are going to struggle to meet your loan requirements.
It means that you are going to find it even harder to pay back your loans.
This will ruin your credit history.
If you pay particular attention to the above points, it’s not so difficult to build an impressive credit history and take your small business to greater heights!