7 Essential Tips for Maintaining a Great Business Credit Profile (Even During Hard Times)

7 Essential Tips for Maintaining a Great Business Credit Profile (Even During Hard Times)

7 Essential Tips for Maintaining a Great Business Credit Profile (Even During Hard Times)

A great business owner is there to step in when customers and employees need them. Their day-to-day work and responsibilities may not always be apparent, but that work is what lays the foundation that helps the business grow. 

Similarly, business owners don’t often realize that behind their business is a business credit report that can help them when it’s needed.

Here are 7 essential tips for maintaining good business credit. 

Importance of Business Credit for Funding, Vendor Accounts, And More

Strong business credit can help your business qualify for small business loans and lower interest rates, get longer payment terms with vendors and suppliers (net-30, for example, instead of net-15), land contracts with larger companies, get better rates on business insurance, and establish valuable partnerships. It can play a key role in helping your business maintain healthy cash flow. 

Similar to personal credit scores that are used to evaluate personal creditworthiness, business credit scores assess the creditworthiness of the business itself. They are influenced by factors like payment history, credit utilization, and length of credit history. 

Knowing and managing your business credit can lead to better loan terms, higher credit limits, and more negotiating power, ultimately contributing to your company’s financial health.

Monitor Your Business Credit Reports Regularly

Let’s be honest here. Checking your business credit reports isn’t as fun as, say, seeing how many new sales your business has made. 

But it is essential, and could have an impact on future sales. Regular credit monitoring helps you see what lenders see, and can alert you to potential problems including identity theft. 

Check Reports From Experian, Equifax and Dun & Bradstreet Periodically

Major business credit reporting agencies like Experian Business, Equifax Business, and Dun & Bradstreet create credit information on businesses and then sell that information to lenders, insurance companies, and other businesses that want to check business credit. 

Do you know what your business credit report says about your business? Checking your reports from these business credit bureaus is the only way to know what’s being reported about your business. 

Look for Errors, New Accounts, Derogatory Marks

Mistakes happen. Businesses with similar names get confused with other businesses. Businesses move, change their names, or merge and credit information may not make the move smoothly. 

Regularly reviewing your credit reports enables you to identify any discrepancies that could be unfairly lowering your business credit scores. We’ll delve into these discrepancies in more detail shortly. 

Dispute Any Inaccuracies With the Credit Bureaus

If you do find mistakes on your business credit report, you’ll need to dispute those errors. The process isn’t always as easy and straightforward as it is with consumer credit reports, where federal law spells out the process for handling disputes. 

Pay Attention to UCC Filings

UCC stands for Uniform Commercial Code and a UCC filing occurs when a lender claims a security interest in a business’s assets as collateral for a loan. UCC liens are filed in court, and are a matter of public record. 

They can impact your business’s ability to secure financing.

Lenders often review UCC filings to assess the number of existing claims against a business’s assets. Multiple UCC filings might signal to potential lenders that significant claims on your business assets already exist, leaving them with fewer options if the new loan isn’t repaid. Even if previous debts are settled, UCC filings can remain on your business credit report for an extended period, potentially affecting your creditworthiness.

To mitigate the impact of UCC filings on your business financing prospects, regularly review your business credit reports for active UCC filings, especially those tied to debts that have been paid off. 

If you find outdated or settled liens, you’ll need to try to get the UCC filing released or removed, which usually means requesting the filing of a UCC-3 form, a legal document used to terminate a lien. Keeping your UCC filings up to date ensures that your business credit profile accurately reflects your current financial situation and doesn’t unfairly hinder your ability to secure new credit or loans.

Make All Payments on Time (Or Even Early)

Paying on time is the single most important thing you can do to maintain a good business credit history (or a good personal credit history for that matter).

It’s pretty straightforward. Missed payments hurt your scores and timely payments help them. 

Payment History Is the Biggest Factor in Business Credit Scores

Unlike personal credit, where payment performance is often reported in 30-day increments, business credit reports typically report using “Days Beyond Terms (DBT)” to provide a more nuanced view of payment habits. 

For example, paying an invoice two days late may be reported as 2DBT. DBT can significantly influence your credit scores. For example the D&B Paydex Score considers your current DBT, average DBT, and highest DBT. 

It can get even more nuanced: your payment history may be compared to other companies in your industry, sector and/or geographic area. Paying faster or slower than your peers can help or hurt your scores. 

Automate Payments for Accounts When You Can

To ensure you never miss a payment, consider automating as many payments as possible. Automated payments make it easier to maintain consistent payment history and reduce the risk of accidental late payments. 

This strategy isn’t just about convenience; it’s about building a good business credit scores and then protecting them by making sure you don’t get busy and miss a due date. Since payment history can affect your credit scores for years to come, setting up systems ahead of time can head off future headaches. 

Pay Early if Cash Flow Allows

If your business’s cash flow permits, paying bills before they’re due may benefit your credit score. (Early payments can potentially boost your Paydex score with Dun & Bradstreet, for example.) Paying early can reduce your credit utilization ratio, an important factor in some credit scoring models. 

Keep Business Credit Utilization Low

Some business credit scores, and all personal credit scores, consider a factor called “credit utilization,” “debt utilization,” or “debt usage.” This factor compares the balance reported on revolving accounts and compares that to the reported credit limit. Balances that are closer to the limit are often considered higher risk. 

Business credit reports often don’t list credit limits; in those cases the highest balance may be substituted for the credit limit for this calculation. 

Aim for Under 30% Utilization of Total Credit Limits

There’s no perfect credit utilization limit, but as a rule of thumb, it’s a good idea to keep your credit utilization below 30%, and even lower may help your credit scores, depending on all the information in your credit reports. 

Here’s how to calculate your credit utilization ratio. Let’s say you have a combined credit limit of $100,000 between your business line of credit and your business credit cards. If you’re using $25,000 of that available credit, your debt utilization ratio is calculated as:

$25,000 / $100,000 = 0.25

In this case, your credit utilization ratio would be 25%. 

Utilization can be calculated on individual accounts as well as in the aggregate (all revolving accounts added together.) 

Request Credit Limit Increases Periodically

If the creditor reports credit limits, then getting a higher credit limit may improve this ratio. In the example above, if the total credit limits were $200,000 instead of $100,000, the credit utilization with a balance of $25,000 would only be 12.5%. 

Here’s How to Get a Credit Limit Increase on a Business Credit Card

Make Payments Throughout the Month if You Have High Balances

It’s not always possible to get a credit limit increase or to pay down balances significantly. If cash flow is tight, consider making payments throughout the month to chip away at your balances. Multiple monthly payments don’t directly affect your credit scores, but the timing may help.  If you reduce your balance before the credit card issuer or lender reports the balance to the credit bureau, your debt utilization may be better than if you want until the payment due date. 

Maintain a Mix of Credit Types

A mix of different types of accounts is often more important for personal credit than business credit; still, having too few accounts on business credit reports can lead to a low business credit score. It’s very common for businesses with low scores to find that it’s not negative information bringing their scores down: it’s a lack of accounts reporting that’s keeping their scores low. 

Most businesses will benefit by having at least 3-4 different accounts on their credit reports. Accounts are often called “tradelines” in the business credit world.

You can build tradelines through trade credit accounts (also known as net-30 accounts), business credit cards that report to business credit, and with tradelines like Nav Prime. And once you get those accounts, of course, you’ll want to make timely payments. 

There are plenty of options available to startups as well as established businesses. 

Having Loans, Cards, Lines of Credit Shows Responsible Management

Why do credit scoring models look at the types of accounts and account mix? It’s simple: statistically, reports with a mix of different types of accounts tend to be less risky. 

Apply for New Credit Only When Actually Needed

While having a mix of credit types is beneficial, it can be helpful to be strategic about applying for new credit. This is especially true with personal credit, where inquiries may hurt your credit scores. (Business credit reports don’t always list inquiries.) 

Close Unused Accounts Carefully 

Before you close an account, consider the impact to your credit scores. Closing accounts can affect how many open, active accounts you have, your total available credit, the age of your credit history and more.

Again, this is often easier to quantify with personal credit than with business credit. 

That doesn’t mean you shouldn’t close accounts you don’t need or want; just be conscious of the impact on your credit scores over time. Note that it’s not unusual for credit scores to dip after accounts are closed, but usually the effect is temporary if your credit is otherwise strong. 

Protect Your Business Credit Profile

Learning how to establish business credit is the first step. Keeping a strong business credit profile is an ongoing process. But it doesn’t have to be difficult. In addition to the steps above, you’ll want to stay on top of any changes to your business credit. 

Check Business Credit Reports for Signs of Identity Theft

The numbers don’t lie. Business identity theft is on the rise. I can attest to that as a victim of both personal and business id theft during the pandemic. 

Rather than waiting until your business gets calls from collection agencies, or even sued for debts it never incurred, check your business credit reports on a regular basis. If something unexpected happens, you can investigate. 

Consider Credit Monitoring Services

Credit monitoring can alert you to changes in your credit, including inquiries or new accounts, late payments, and in the case of business credit, UCC filings. Most credit monitoring services only monitor consumer credit reports and scores. 

Nav is different. Nav is the only place to provide both personal and business detailed credit data from six reports, so you can see your relevant credit information and how lenders and credit issuers evaluate your creditworthiness through Nav’s Detailed Credit Reports. 

Freeze Credit Profiles if Not Applying for New Credit

If you’re concerned about fraud, consider freezing your personal credit. (Currently you can’t freeze business credit.) 

Some business credit bureaus, like Experian, allow businesses to add a fraud alert to their credit files. This can help deter  identity thieves from opening new accounts in your business’s name. 

Separate Business and Personal Credit & Finances

As you build your business, focus on creating a clear line of separation between your business and personal finances. 

Form a Business Entity

You can build business credit as a sole proprietorship, but it’s harder. And even if you are successful in building that credit profile, there’s no legal separation between you and your business. As soon as it’s feasible, create an LLC or corporation to separate your business and personal finances. 

Don’t Commingle Business and Personal Finances

Keeping business and personal finances separate is important for many reasons, and one of them is to maintain asset protection if you’ve formed a business entity like an LLC or corporation. If a transaction belongs to the business, make it from a business account. And if it’s personal, use a personal payment method. 

And if you make any money in your business, file your tax return as a business. For sole proprietors that usually means reporting business income and expenses on Schedule C with your income tax return. 

Don’t Use Personal Accounts

Use a separate business bank account, business debit card, and a business credit card for business purchases. This helps to truly separate your business and personal finances, and makes life a lot easier at tax time! 

One way this trips up some small business owners is that they deposit all their money (business and personal) into one account, or they use their business checking account to pay personal expenses. Don’t do that. Deposit business income into your business checking account and pay yourself using a payroll service, or through distributions or owner’s draw. 

Watch Personal Guarantees

If you sign a personal guarantee, you agree to be personally liable for the debt if your business doesn’t pay it back. Sometimes PGs are inevitable – most major small business credit card issuers require them, for example. But as you build your business and business credit, you can begin to move away from personal guarantees. 

Build Business Credit Apart From Personal Scores

Key to separating your business and personal finances is making sure you have a strong business credit history. Establish business credit, then work to keep it strong by following the steps outlined here. 

Key Takeaways on Actively Managing Business Credit

It’s not terribly difficult to build business credit but it doesn’t just happen. Most entrepreneurs will need to take steps to get there. 

It’s an Ongoing Process, Not a One-Time Effort

Building a financially healthy business is like building good habits. Put in a little time and effort now to get started establishing business credit and the foundation for your business, then spend just a few minutes each month checking in periodically to tweak it. 

Good Business Credit Unlocks More Opportunities

You may not always know when your business credit rating helps you. No one has to tell you when they’ve checked your business credit, and some reports don’t even list inquiries. But when you get offered great financing options or other opportunities it’s likely your business credit has played a role. 

How Nav Can Help

Nav can help you implement the steps described here. With Nav Prime, you’ll get Detailed Credit Reports with tradeline reporting, along with tools to help you Strengthen your business’s financial health profile to access better funding options.

Customers who used Nav’s Detailed Credit Reports with tradeline reporting saw an increased business credit scores up to 50% in the first 3 months.*

And the majority of customers that use Nav tradeline reporting at least a year continue to see positive business credit score changes.**

*Based on aggregate data tracking Experian® Intelliscore Plus business credit scores after three months of having Nav tradeline reporting. Results will vary. Scores are calculated from many variables; some users may not see improved scores.

**Based upon the aggregate percentage of Nav customers with positive score changes, nearly 75% of customers continue to see positive business credit score changes across business credit bureaus by keeping their Nav tradeline at least a year.

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