Strong business credit is a powerful tool for small business owners. A solid small business credit score can signal to banks and online lenders that your business is financially stable, making it an excellent candidate to receive small business financing if needed.
Business credit has the potential to either help your business with financial goals or hinder your business opportunities.
Small business owners need to understand what business credit is, how to establish credit, and how to improve their business credit score to increase opportunities and successfully grow their business.
Thankfully business credit isn’t permanent. There are many ways to help improve it. Below we’ve outlined five simple steps your business can take to start building and improving your small business credit score today.
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What is Business Credit Score?
Before diving into how to start building business credit, it’s critical to understand what it is.
A business credit score is a number that helps to indicate your business’s creditworthiness and if your company is a suitable candidate to receive a loan and be a trustworthy borrower.
Business Credit Score Criteria
Business credit scores are based on your company’s financial history. Scores range from zero to 100 and are established based on specific criteria.
Credit bureaus calculate small business credit scores. Each bureau has a different way of calculating business credit scores. But several common factors can affect business credit scores across all issuers.
- Legal filings
- Business size
- Business Type
- Time in business
- Outstanding balances
- Company history of repayments
- Your business’s last 12 months of payment history
- The number of late payments on your business accounts
Benefits of Strong Business Credit
- Good small business credit gives your business the ability to secure financing.
- If your business has bad credit, it’s harder to qualify for loans, credit cards, and other financing options.
- A good business credit score can lead to better rates and terms on any small business loans.
5 Ways to Improve Your Small Business Credit Score
Companies don’t start with good small business credit scores. They have to build or rebuild them if their business had previously struggled.
Use these tried and true methods to help boost your small business credit score.
1. Open a Business Credit Card
 When starting a new business, a smart first step is to apply for a business credit card to help cover day-to-day operations for your business and help establish business credit.
Business credit cards are issued based on your personal credit, which means start-ups and brand-new businesses can qualify for a business credit card.
Business credit cards can also benefit those who don’t qualify for a small business line of credit or small business loan, as they tend to have more lenient qualifications.
Using a business credit card helps to separate personal and business finances, which can help build business credit and will help when filing business taxes as well.
2. Practice Smart Spending
A business credit card can be one of the best tools for building small business credit when responsibly used. Make sure your business practices smart spending with a business credit card or any business financing option, including small business lines of credit and small business loans.
Here are a few tips that can help:
- Make timely payments
- Schedule calendar alerts for regular payments
- Pay your business credit card off each month if you can
- Use your business credit card for specific purchases – to better control and track your spending
- Only make purchases you’re confident your business can pay off
3. Keep Your Credit Utilization Ratio Low
The credit utilization ratio is the sum of all credit used divided by the total amount of credit available to your business.
Many credit reporting agencies review your business’s credit utilization ratio when determining credit scores. A low credit utilization ratio can help your business’s credit score because it shows that your business is responsible and less likely to max out your credit than a business with a high credit utilization ratio.
Here are a few ways to maintain a low ratio:
- Decrease business credit card spending
- Make multiple payments on your bills each month
- Pay off your balances, or get them down as low as you can – don’t just pay the minimum
- Ask your business credit card provider to increase your credit limit –increasing the credit limit automatically decreases the ratio if you keep your business spending the same.
4. Keep Business Information Current with the Bureaus
It’s a good idea to regularly check and update your business credit report at each of the three main credit bureaus (Dun & Bradstreet, Experian, and Equifax), as they all collect different information that can affect the outcome of your business credit score.
Not every lender or supplier reports to all three bureaus, so any one of the reports can be pulled when they’re deciding if they want to work with your business.
It’s important to review your reports regularly to see your current status, check for errors, and update any old information that could affect your business credit score.
It’s also a good idea to make your business profile at each credit reporting bureau as complete as possible. Update basic information about your business any time a change occurs, such as the number of employees, financial documents, and years in business.
5. Register Your Business and Get an EIN
The IRS uses an EIN (employee identification number) to track businesses for tax purposes.
While not every business is required to get an EIN, it can help establish your business credit, so it’s a good idea to look into it. It’s free and easy to apply for on the IRS website.
When your company applies for business financing options or credit products, you’ll usually be asked to provide a social security number or an EIN on the application. If your business has an EIN, that number will be tied to your business credit instead of a social security number, which is personal credit.
Along with helping to increase business credit scores, an EIN can also help further separate personal and business expenses.
Bottom Line
A business credit score is critical in securing small business financing and can help your business achieve its financial goals and improve overall fiscal well-being.
Even if your business doesn’t have the best credit score, there are many ways to improve your credit. Use this article and five credit-improving tips to help better understand business credit, why it’s essential, and how to establish and build credit for your business.
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