Most people know their personal credit score. As a small business owner, you need to be no less conscious of your business’s credit rating as well, and for the same reasons—your financial potential is in many ways determined by it. Your business credit score is particularly important when you try to open accounts with business partners or apply for financing.
If you do know your business’s credit score and aren’t thrilled with it, don’t fear! There are two main reasons why your business’s score is not as high as you might like: there may be little data to base the score on, or there may have been problems in the past that left a mark on the score. In either case, there are things you can do to improve your business credit score.
Step Toward a Better Business Credit Score
Your business credit score ranges from 0 to 100. It is compiled independently by three bureaus: Experian, Equifax and Dun & Bradstreet. Unlike your personal credit score, your business score is available to the public. Anyone can pay the bureau’s fee and find out your credit score. (You have to pay to find out too.) As of March 2018, the fees are $39.95 for Experian, $61.99 for Dun & Bradstreet and $99.95 for Equifax.
To calculate the scores, each of the bureaus uses its own formula , which they do not publicize. Experian lists the criteria it uses as:
- Number of trade experiences
- Outstanding balances
- Payment habits
- Credit utilization
- Trends over time
- Public record recency, frequency and dollar amount
- Demographics such as years on file, Standard Industrial Classification codes and business size
With these guidelines in mind, we can consider ways to improve your credit score.
- Establish trade lines of credit with vendors that reports to the credit bureaus
Your credit score is based on information gathered by the bureaus, so the more positive information there is about your business, the better your score will be. If your vendors do not report to the credit bureaus, you can find ones that do.
Experian requires one trade line of credit and one demographic element to establish a score. Dun & Bradstreet requires three trade lines. This is an important point:
When establishing new trade relations, you can confirm in advance that the vendor will extend you trade credit and report to the credit bureaus. Then be sure to pay on time, and early if possible. Early payments are reflected in your credit score.
- Get a business credit card or two
Obtaining a business credit card, or a few of them, is another way to generate positive credit data. In addition, credit cards offer benefits and rewards programs that you can take advantage of. Once again, make sure the card provider reports to the credit bureaus.
Business credit cards are one of the easiest forms of credit to qualify for, and can meet financing needs as well as benefit your credit score. Make sure you choose a provider–either a bank or an alternative lender–that reports to credit agencies so you reap all the rewards!
- Pay down your debts
Both the proportion of the available credit your business uses (referred to as its credit utilization) and the actual dollar amount of its debt influence your business’s credit score. They are important indicators of risk for future lenders. Reducing the size of your business’s debt will have an immediate positive impact on the score.
There are a few things you can do to help maintain healthy credit utilization. First, do not close out credit lines that you have a good history with. Even if you do not use them, their presence contributes to lower credit utilization. Another way to improve credit utilization is to increase the credit limit on your business credit cards. Ideally, you should maintain a debt of 20-30% of your business’s total credit lines.
- Keep your public record clean
In addition to the information provided by your business creditors, the credit bureaus will look at public records in which your business appears. While simply appearing in public records is not a cause for concern, bankruptcies, liens, unfavorable settlements, etc. will remain on your credit records for years to come.
- Maintain an impenetrable barrier between your personal and business credit
Using personal funds for business purposes does not contribute to your business credit score and can potentially impact future lenders and business partners. There are also legal reasons to keep your personal finances separate from your business. If your business falls on hard times, you do not want to be personally liable for your business’s financial problems.
There are a few rules that will ensure that your personal and business finances remain untangled:
- Make sure your business is correctly structured and registered with the state
- Open a business bank account and place all the business’s income in it
- Pay yourself and your business’s bills from the business bank account
- Use the name of your business when you do business—with credit cards, vendor accounts, etc.
Although raising your business credit score will require tenacity, many find that the difficulty of the task is overstated. It is possible to raise your business credit score and well worth the effort.
Financing with an SBA 504 loan
There is no minimum business credit score required to receive a Small Business Administration (SBA) 504 loan, but you should be prepared to discuss your score, explain it and discuss what you are doing to raise your score (if necessary). A 504 loan is a partnership between a conventional lender (bank or credit union) and a Certified Development Company (CDC) like TMC Financing. It has three parts:
- The first is a loan from a conventional lender for 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
- Your CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. You can receive up to $5.5 million for manufacturing projects or projects that participate in the SBA’s Green Energy Program. This is your second mortgage.
- Then you, the borrower, contribute 10% to the loan as down payment. Certain types of facilities are classified as single-purpose properties by the SBA and require a 15% down payment.
Conventional lenders find 504 loans attractive, since their first lien position in the loan reduces their risk substantially. This makes it easier to receive financing from them. The 504 loan has a 10- or 20-year term, with a 25-year option to be available soon. All 504 loans are fully amortized (which means they have no balloon payments).
A 504 loan can be used to:
- purchase land or buildings
- construct, improve or upgrade buildings
- purchase equipment with a service life of ten years or more
- refinance conventional debt
The 504 loan provides flexible and cost-effective financing designed to help your small business grow. Its accessibility to those with a less than optimal credit score is one of its biggest advantages. It merits careful consideration when you are looking for a commercial loan.
You can find out more about the 504 loan from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.
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