A strong business credit score reflects a venture’s financial health and capacity to service debt. Lenders and financial institutions assess credit ratings to determine a startup’s exposure to financial risks, such as credit and liquidity risks. Consequently, businesses with high credit scores are at a leverage of earning better credit offers, high approval rates, and favorable financial terms.
But, what is a credit score and how can you build a better score for your business? Here is all you need to know.
What is a Business Credit Score?
A business credit score is a rating that defines the measure to which a business is creditworthy. The score is deduced from a range of factors tied to the financial health of a venture and its exposure to financial risks. Such factors include payment history, tax compliance, existing debts, and debt-to-credit ratios.
Essentially, a score is determined by licensed credit bureaus, such as TransUnion and Equifax. Different bureaus generate varying scores that allow creditors to scan through the financial position of your business through multiple dimensions. For instance, bureaus offering credit failure scores provide insights into the likelihood of a business suffering bankruptcy.
Why Is It Important to Have a Good Business Credit Score?
Overall, a good business credit score benefits a brand where third parties are involved. From suppliers and lenders to potential partners and shareholders, anyone can scour your credit rating to affirm possible business relations.
In a nutshell, here are reasons why you must strive to have a good credit rating.
A Strong Credit Score Is Good for Your Merchant Account Application
If you are running an e-commerce store, then you will need a merchant account to process online payments. However, merchant account providers will factor in your credit rating to approve your account opening application. Having a poor rating may necessitate your business to acquire a high-risk merchant account. Typically, a high-risk merchant account attracts higher fees and costs.
Favorable Payment Terms with Suppliers
A good score is a signal that you can pay creditors on time. Vendors are likely to offer favorable payment terms where high credit ratings are evident.
Better Loan Offers
Sometimes, annual percentage rates, interest rates, and loan repayment terms may be relaxed for businesses with good credit scores.
How to Build Your Business Score
Here is a step-to-step outline of how to build your business score.
Step 1: Get a Business Registration Certification
Having your business registered is crucial to acquiring the necessary operating licenses and permits. In most cases, your business registration details may be used by credit bureaus to establish your credit reports and ratings.
This applies to entrepreneurs operating an e-commerce store as well. Merchant account providers that facilitate online payments over e-commerce spaces may require business certification to validate your account.
Step 2: Get a Data Universal Numbering System (DUNS) Number
Anyone looking to establish your creditworthiness, including credit bureaus, will more than likely look to use your DUNS Number. This is a unique number that acts as an identifier for every business entity. Apparently, businesses working with governments and government agencies must have a DUNS number.
The DUNS number is also an advantage to businesses running an e-commerce store. This is because a DUNS label enhances your identity in the online global marketplace while improving your capacity to acquire loans.
Step 3: Pay Your Bills Early
There is no better way to boost your credit score than to pay your bills, debts, and credit in time. Early bill payment is even better for credit ratings. If automated online payments are your preference, follow up to ensure transactions are initiated and completed.
Step 4: Get a Business Credit Card
Business credit ratings are separate from personal scores. Therefore, getting a business credit card allows you to put a line between your personal and business borrowing, and that is good for your score.
Step 5: Keep Track of Your Credit
Monitoring your credit goes a long way in identifying existing errors in your credit history and scores. Also, it is important to follow up with all the key credit agencies to ensure your credit is helping in improving your ratings.
How Long Does It Take to Build Your Score?
How long it takes depends on the period your business has been in operation and the date you report your payment history. However, in most cases, new accounts take between three to six months to feature on business credit reports. After appearing on credit reports, you will need to make several on-time credit settlements to have your score tabulated. The more credit payments you make on time, the higher the business credit score.
How to Maintain a Good Score?
Once you have achieved the level of credit score you wanted, it will take you a few efforts to maintain the rating. Here are some steps you can take to maintain a good score.
Create Strong Financial Habits
Informed financial habits revolving around savings, bill payments, tax filing, and borrowing are crucial to maintaining good credit ratings.
Monitor Your Score
Tracking your score helps you in ensuring the score is accurate always. Score errors are common, and raising disputes against such errors is important to maintaining a good rating.
Avoid Personal Credit to Finance Your Business
You cannot afford to damage your business and personal credit score at the same time.
Ultimately, a good score works for your good, whether you run a physical business or an e-commerce store. It proves to lenders and potential business partners that you are capable of liquidating your credit in time. As a measure of creditworthiness, a good score can help you negotiate better deals and favorable borrowing terms. Essentially, your business has a responsibility to build, track, and maintain a good score for its overall financial prosperity.