Credit scores are as important to businesses as they are to individuals. A good business credit score can mean everything, from negotiating payment terms with vendors and suppliers to getting a business line of credit from your bank.
If your business is carrying a lot of debt, it might be impacting your ability to secure funding for your company. Not using business credit at all, however, is also a detriment. There may also be an interplay between your personal credit and your business. Will paying off your debt – both personal and business – increase your business credit score?
The paradox of personal and business credit scores
Business and personal credit are separate, right? The answer is complicated. If a business is just starting out, or a sole proprietorship, there is a good chance that lenders will check your business and personal credit scores.
Further muddying the waters, if your personal score is good but your business one is poor or nonexistent, you may be asked to sign a personal guarantee for credit. If so, your personal score will absolutely make a difference in your business’s ability to get funding with a bank or a line of credit.
In these cases, cleaning up your personal credit, including taking steps to pay down debt, may help your business. Completely paying off your debt may not be your best bet, but improving your score certainly can’t hurt. If this sounds like you, get a copy of your personal credit report and work on building better credit.
You might also want to get a copy of your business credit score to check in on where your business stands or verify that you even have a credit score. They aren’t free like a personal report can be, but it’s worth it to know what it is and how it can improve.
Strategies to improve your business credit score
If your business does have a credit rating but it needs cleaning up, there are some easy ways you can take care of that.
First, make sure you’re working with vendors that report payments. You may have a perfect payment record with a local supplier, but if they don’t report your payment history to the credit bureaus, it won’t help your rating. Ask any of your vendors that you have established payment terms with if they report. If not, consider adding vendors to your roster that do.
Once you have established payment terms with vendors that will report your payments, make sure you pay them on time. Better yet, pay them early. Dun & Bradstreet’s widely used business credit scoring system, from 1 to 100, is based on your payment history. Paying on time gets you a decent score, but paying early is the only way to get anywhere near 100.
As with your personal credit report, you should monitor your business report regularly. Errors can happen, and you should work to clear those up as soon as you discover them. The lower interest rate you get from a good score will more than offset the cost of acquiring your credit report.
You should also concentrate on keeping your debt ratio low. The amount you owe versus the amount of credit you can use impacts your score. Paying down your debt is good, but in lieu of that, consider opening another line of credit. Although it might seem counterintuitive, it can help your business’s credit score.
Lastly, if you haven’t established credit with vendors or gotten a business credit card, do so, even if early on you need to personally secure the loan or line. The more of a credit history you can establish for your business, the less your personal finances will affect your business’s ability to get financing.