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Updated: Feb 5, 2020
Establishing business credit should grant you a sense of accomplishment, but it’s the first step of a long journey. Keeping your business credit in good standing takes vigilance and a good deal of care.
Here are some pointers for maintaining a good business credit score:
To begin with, be sure you understand how each bureau evaluates business credit. The Dun & Bradstreet PAYDEX score, which reflects nothing but your payment history, employs a 100-point scale. According to company representatives, it’s advisable to keep your score at 80 or above. A score of 80 tells lenders and vendors that you routinely pay your obligations on time. A score below 80 reflects a history of late payments. The lower the score, the greater the average number of days late. 76, for example, means that on average, you pay your bills eight days late. 69 denotes a late-payment average of 10 days. The only way to keep your score above 80 is to pay your commitments early, preferably, before the invoice due date.
In addition to your payment history, Experian examines legal filings, public records and collection agency data, to determine your company’s credit quality. A score between 75 and 100 is considered excellent. 50 to 75 is average. If your score falls into the 25-to-50 range, creditors will likely label your company medium risk. 10 to 25 is medium-high risk, and anything below 10 is considered high risk.
Equifax offers a range of business credit risk assessment services, that take into account data similar to that used by Experian. The Small Business Credit Risk Score for Financial Services, runs from 101 through 992, and according to company representatives, a score above 566 is acceptable. The Small Business Credit Risk Score for Suppliers, a rating of the risk of your company’s payments being delinquent over the next 12 months, ranges from 101 to 816. A score above 539, estimates your likelihood of making delinquent payments to be at most 2.2%. Falling in the 365 to 396 range, raises that likelihood to 39.9%. On the plus side, Equifax provides reason codes, which help explain your score, as well as advice on how to improve it.
To underscore the point, paying your bills in accordance with established terms is critical. It shows vendors and lenders alike that you are responsible, and that your business’ cash flow is sufficient to meet its obligations.
Keeping your business credit separate from your personal credit is also key. Establish business checking and credit card accounts, and use those to cover business expenses. When your business is small, it may seem expedient to pay business costs with your personal card. But this practice — though common — will only serve to blur the line between the two credit records. You don’t want a blot on one to have a derogatory impact on the other. Use strict credit “hygiene,” to safeguard your business score and prevent threats to your company’s reputation.
While you can’t allow the two credit identities to merge, you can use the same powerful strategy to manage both. Monitoring your score for changes or false information is crucial. As data from each of your creditors is being reported every 30 days or so, your score can deteriorate in as little as three months. Derogatory factors on your report might prompt suppliers, for example, to demand cash payment upfront for deliveries. Banks might reduce your credit limit. In short order, your cash flow could be put to a severe test. Sometimes, your credit suffers for reasons that are out of your control. In those instances, it is important to follow these steps to improve your business credit score.
Each credit reporting bureau offers monitoring services that range in cost from $20 per month to $1,099 per year, or more. In most cases, you’ll be notified if your score changes, and allowed free access to your full report to investigate and address any issues. There are also companies — separate from the bureaus — whose sole function is to monitor business credit.
Keep in mind that you can monitor the credit of other companies you’re considering doing business with, via any of these services. Steering clear of companies with spotty payment histories can help ensure your business’ financial well-being.
Your business credit score can drastically improve your chances or receiving a small business loan, or put a damper on your ambitions for the growth. Employing a few simple strategies can help you maintain a quality score, in turn enhancing your company’s reputation and bottom line.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.