Capital is essential for any business, but sometimes our commercial credit becomes unhealthy. Unfortunately, when a commercial credit rating isn’t perfectly clean, sourcing a small business working capital loan or another form of finance isn’t always straightforward. You might be asking yourself, “So what exactly can I do to improve my business credit rating?”
Every savvy entrepreneur must smooth the peaks and troughs of revenue to keep up with payroll and inventory, while also financing growth toward future success. For most enterprises, this means accessing business funding from time to time rather than relying on reserves, whether this credit is taken through mainstream banks or alternative finance.
To increase your chances of getting credit at an affordable rate, it pays to take steps to improve your business credit — and it’s simpler than you might think. Here’s what to do.
1. Get Your Books in Order
If you’re looking to obtain a new line of credit in the near future, it’s important to first assess your situation and then proceed with a little caution. Each credit application you make will be recorded on your file, and multiple rejections will count against your score.
Before applying for any funding, spend some time getting your finances into good order, researching your options, and finding a credit source that’s likely to approve your application.
2. Separate Your Business Identity
When building your business credit rating, it’s essential to establish a business credit identity distinct from your personal rating.
If you’ve not already incorporated your business, then consider doing so, and also obtain a federal tax ID number (EIN in the U.S. or a BN in Canada) or equivalent registration. Make sure all your bank accounts and credit cards are in your business’s legal name, and that you don’t use any personal accounts for business purposes.
3. Build Your Profile
The three major business credit reference agencies keep their own files, and it’s important to ensure your profile with each is complete and accurate. Check that Experian, Equifax and Dun & Bradstreet all hold the correct details about your business, and that all your active trade lines are recorded on your file.
If you have any longstanding credit accounts with suppliers, add them as references on your profile. Even if they don’t actively report to the agencies, your good records with them will be taken into account. Going forward, regularly check your file for any errors, omissions or signs of unknown activity.
4. Arrange Credit With Suppliers
Each bill you pay on time will give a small boost to your business’s credit score, and you can increase this effect by paying bills early whenever possible. Even better, if you establish credit lines with your suppliers and stick to the terms, each transaction will add a positive to your credit profile.
5. Avoid Signals of Financial Distress
As well as being conscientious about paying bills promptly, you should avoid showing any signs of financial distress that could lessen your creditworthiness. Filing accounts and paying taxes on time will give your rating a boost, while paying down debts and avoiding using credit for routine expenses will send signals of stability.
6. Cut Back on Credit Usage
Whenever you’re looking to obtain a major new line of finance, you should aim to present a picture of clean credit activity within your current circumstances. Ideally, your ongoing level of credit utilization should be no more than 30% on each account your business holds. Try and avoid unnecessary spending on credit or building up balances. You should also pay down what you can — and clear your borrowing each month when you do spend on an account.
7. Consolidate Accounts
If you have credit card accounts with zero balances, it may seem a logical choice to close them down and simplify your business’s financial situation. However, if you want to boost your credit rating, the smarter choice is to keep these accounts active so long as they’re in good standing.
Closing an established, zero-balance account will remove positive history from your file, worsening your rating. Instead, take the opportunity to balance any debts across multiple accounts, so that each has no more than the all-important 30% utilization of its credit limit.
Few businesses can be totally self-sufficient. However, accessing business funding doesn’t need to be expensive or complicated. Taking a little time to improve your business credit rating will make obtaining commercial credit easier and more cost-effective, leaving you free to concentrate on driving your business forward.