When it comes to your business credit scores, one or two mistakes can make a lasting impact. Happily, learning how your business credit report works will help you lessen the impact of those mistakes and avoid repeating them in the future. Even business owners with strong personal credit should take time to master this information, because business credit works a little differently. Here are five mistakes you should avoid when it comes to keep your business credit in tact.
1. Not Utilizing Any Credit
If a credit reporting agency doesn’t know anything about your business, they can’t make a fair assessment of whether your company is low or high risk.
If you have no or very few credit accounts in the name of your business, you may not even have a business credit score at all — Dun & Bradstreet’s PAYDEX score for example, which is used by vendors and suppliers to evaluate whether your business pays on time, requires two tradelines and four payment experiences to start generating a score on your business.
2. Failing to Check Your Report for Errors
In the world of business credit reports, more errors exist than do in the world of personal reports. Errors can occur, for example, if you a business in another state operates under the same name, or because a business in your state uses a DBA similar to your business’s name, or even just because a reporting agency has out-of-date information on your company.
Mitigate this problem by looking at your business reports section by section. Check that there are no derogatory marks bringing down your score that were wrongfully associated with your business. Make sure information about owner(s) and industry classification are correct. Check that all tradelines reporting information about your business are companies you actually work with.
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3. Thinking a One- or Two-Day Late Payment Won’t Matter
Read your vendor terms carefully. If you’re supposed your payment is supposed to be sent in or postmarked on the 1st of each month, consider sending it in on the 29th. If the payment arrives early, it can boost your scores, plus it’s a good idea to have that wiggle room if your cash flow can handle paying a couple days early.
Payment history is typically the most important factor influencing business credit scores. The best indicator of whether your business will pay its bills on time in the future is whether it has consistently paid bills on time in the past, so paying on-time (and early when you can) can make a large positive impact on your scores.
4. Utilizing a Large Percentage of Your Total Debt
You may know that high debt usage can have a big negative affect on your personal credit scores. High utilization on trade lines in the name of your business can also affect your business credit scores.
This factor is trickier than it is for personal scores, because many business tradelines that are recorded on your business credit report don’t have a debt limit. For some business credit scores, like the Experian Intelliscore, it’s a good rule of thumb to keep your total credit balance at 30% or less of your highest historical debt amount.
In comparison to personal credit, high utilization on business credit lines and credit cards shouldn’t negatively affect your score as much, but it’s good to keep an eye on.
5. Thinking Your Personal Credit Problems Don’t Affect Your Business
The owner’s personal credit history won’t affect all types of business credit scores, but it will for some. In fact, the owner’s personal credit history plays a role in calculation of the FICO Small Business Credit Score, which is the score the SBA uses to pre-screen applicants for 7(a) term loans less than $350,000 (their most popular loan program).
Your personal credit scores will almost always be called into question when it comes to evaluating your business for loans, lines of credit, and business credit cards, thus it’s important to maintain healthy personal scores.
Other Ways Your Score Might Be Influenced
Unfortunately, there are a few factors out of your control that can affect your business credit score without you realizing it.
Larger companies have inherently less risk, so smaller companies may see their size adversely affect their scores. The same goes for years in business—companies with a proven track record and dated payment experiences are seen as less risky than a company that is still getting their feed underneath them.
Lastly, the amount of risk in your industry can play a role in influencing your score. Your industry is determined by your NAICS code listed on your business credit report. Check your reports to ensure you aren’t incorrectly categorized in a more volatile industry than the one you operate in.