Having access to good credit is a key component in everyone's life. It determines whether an individual or company can obtain credit and how much interest is paid back on any loan.
However, some small business owners don't realize they have a company credit score. But if you have an Employer Identification Number, then you will also have a credit score associated with your organization as well as your person. It's important to keep track of this, since it can be a prime determinant in a host of business functions, from financing options to potentially acquiring a lease for new office space.
While there's no single, silver bullet that can automatically fix a bad credit score or make a mediocre one suddenly majestic, there are definitive steps that any business owner can take to improve his or her business credit score.
Pay the company's bills on time
It might be tempting to hold off on making a monthly utility payment and instead waiting a bit until there's more working capital in the company's bank account. Not only is making timely payments a solid business strategy to maintain good relationships, but this will also help lower a business credit score. As noted by FICO, the most important thing a lender wants to know about a company is its ability to pay past credit accounts on time, as this accounts for 35 percent of a FICO credit score. One or two late payments will not necessarily devastate a score, as an otherwise solid credit picture can usually overcome this problem.
However, it should be noted that paying on time is no guarantee that a small business will have a perfect credit score either, since this is only one of several different aspects used in the calculation, along with amounts owed, length of credit history, credit mix in use and new credit.
Separate the company's assets
For many small business owners, it can be tempting to use personal credit for business purposes or vice versa. This can create problems if one side falls behind, which can lower a credit score for both sides. It's important for small business owners to always use their company's EIN on all business credit applications and their own Social Security number on personal requests. Keeping these two separated makes record keeping simpler and less convoluted.
Watch the company's credit usage
In addition to a timely payment history, it's important to limit credit usage, as the amount of money owed to banks or other lenders will also affect a credit score. This doesn't necessarily mean not to use credit since this is necessary for a small business to establish a payment history and display an ability to repay lenders. In many ways, a certain amount of debt is a good thing for any company. The best way to determine the financial leverage for a small business is by utilizing the debt-to-equity ratio as a metric.
Simply stated, the DTE ratio can be represented as the calculation of all short- and long-term debt plus any leases, divided by the company's current equity, according to Accounting Tools. For example, if a company has $10,000 in short-term debt and $10,000 in leases, with $100,000 in equity, then the ratio would come out to 0.2 or 20 percent, which is not that bad of a number. Ideally, a small business doesn't want be leveraged more than 30 percent.
Expand the company's credit limit
Going this route is tricky, and requires a bit of caution, but increasing the company's credit limit is another way to potentially boost its credit score. By bumping up the amount of credit available to the company, it can minimize the appearance of overall utilization, according to Inc. contributor Jared Hecht.
"Instead of reducing the slice of your metaphorical credit limit pie being used," Hecht wrote, "you're simply making the pie bigger."
However, as noted, this tactic should be approached as a cautious endeavor and used sparingly. Applying for credit usually involves a "hard credit inquiry" and the more of these inquiries on a credit history, the greater the chances of them negatively affecting the company's score.
Try alternative financing
Sometimes a less-than-stellar credit score is beyond the control of a small business. There could be a major delay in accounts receivable that then impacts everything else down the entire line, causing additional financial backlogs and late payments. Unfortunately, when a small business owner needs access to credit, he or she simply can't tell the lender it was somebody else's fault.
Thankfully, most alternative lenders don't require a company to have the best possible credit score to obtain a small business loan. With an easy online application, even small businesses with poor credit scores – or even those without a credit score – can find the working capital they need to keep the company going strong.