As a first-time small business owner, you will likely reach a point when you consider opening a line of credit or taking out a loan. A sensible approach is to start building your business credit score ahead of time, as this should make it easier to secure the funds your business needs.
Developing a strong business credit score can go a long way to helping your chances of success. But where do you start and what can you do to improve your chances of getting the loan or line of credit you may need in the future?
We cover the basics, so you know what to expect and how to plan your next steps.
What Is a Business Credit Score?
Lenders will use your business credit score to assess your perceived ability to repay loans and other forms of credit. They will look at a variety of factors to determine how much they are willing to let you borrow, such as:
- The type of finance you have previously taken out
- How you have managed previous debts
- The total amount of debt you owe
- If you have made any recent credit applications and their status
For a small business line of credit up to the value of $1 million, lenders will look at your FICO LiquidCredit Small Business Score. This report is generated by using information provided by credit reporting agencies Dun & Bradstreet, Equifax, and Experian.
The FICO score is ranked between 0 and 300 – the higher the number, the less risk lenders will associate with your business.
Is Business Credit Different from My Personal Credit?
In general, yes, but for start-ups there may be some initial crossover. Lenders may use your personal credit score to approve a line of credit if your business does not have much of a credit history.
Why Is My Business Credit Score Important?
There may come a time when your business needs extra financial support, whether it’s during a lean period or if you need to invest and expand your operations.
Maintaining a good score enhances your creditworthiness in the eyes of lenders, so if you need to set up a line of credit or secure a loan, you could have more options available to you. Of course, you may still be able to get credit with a less-than-perfect financial history, but the terms will usually be less favorable.
How to Build Your Business Credit Score
1. Set up a Business Bank Account
Open a business bank account and use it regularly. The longer you actively use the account the more you will demonstrate to lenders that you are financially responsible and can be trusted to manage your debts.
2. Stay in Control of Your Business Finances
Keep on top of your bank account finances and ensure you always have enough funds or an approved overdraft to cover any shortfalls that may happen from time to time. You’ll have various business overheads to cover every month along with ad hoc expenses along the way too.
3. Keep up to Date with Your Company Bills
Always pay your business bills on time, every time. Depending on the nature of the payment, even missing or delaying them can have a knock-on effect on your business credit score. Lenders will always look at your credit report to see if there is a history of any bad credit events.
4. Take Care of Your Personal Finances
Keep your personal finances in order too, as your own credit history could be used to assess your credit worthiness. This is especially true for startups and newly founded companies who have little-to-no financial information available.
5. Limit Your Business Debt
Only seek out credit when your business needs it. Opening unnecessary lines of credit can put an unneeded financial strain on your business. And if you make too many applications in a short space of time this can be seen as a red flag by lenders who may believe that you are desperate for the cash.
6. Leverage Your Supplier Relationships
Your suppliers may also be able to lend a helping hand. If you maintain a good working relationship with them, you could ask them to share feedback and payment record date with credit reference agencies, which can help to boost your credit score over time.
Final Thoughts
Even if you don’t need to set up a line of credit right now, it’s a good idea to prepare your business for what it may need in the future. For example, you may want to expand your business and invest in new equipment or stabilize your cash flow during quiet periods. While it is different from your own personal credit score, lenders may still review your finances if your business does not have a long enough credit history. Managing your debt, paying your bills and generally staying on top of your finances will all go a long way to building up your business credit score and boosting your chances of getting the credit your business needs.
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