How To Build Your Small-Business Credit Score
By: How To Build Your Small-Business Credit Score - July 13, 2018
Most of us know we have a credit score that determines our creditworthiness as an individual. Typically, personal scores range anywhere from 500 to 800. But what many people don’t realize when starting a business is that it has its own credit score with a unique algorithm that determines your company’s creditworthiness. Unlike a personal score, a business credit score typically ranges from 1 to 100, with 100 being the best possible outcome.
Why do you need a business credit score?
Separating your business and personal assets is critical. One of the key benefits that corporations and limited liability companies (LLCs) provide is the protection of your personal assets. To keep this protection, it is critical that you consistently show a clear separation between yourself and your business. Establishing your small business’s credit can help you do this.
Additionally, having a positive business credit score can:
• Position your company for more favorable payment
• Reduce the number of times you will need to prepay for products or services purchased
• Allow you to obtain better interest rates and credit terms from lenders and banks
What makes up a business credit score?
Most of the credit bureaus are secretive about the formulas they use to create a business credit score, and some even admit that there can be more than 800 different data points that are taken into consideration. That can make it feel daunting to build up your business credit. Luckily, we can look to consumer credit scores to give us a good sense of the factors that are likely to be the most important, namely:
• Payment history: If you’re a new business trying to build up credit, make sure you pay your bills on time. This will establish a history of being reliable and make future lenders more willing to loan you money with more favorable terms.
• Credit utilization: This is basically a fancy way of saying that if you have five business credit cards that are all maxed out, you have a 100% credit utilization. You don’t want to find yourself in this position often, because it looks like you can’t pay your bills. Try to keep your credit utilization ratio around 30% when possible.
• Credit history: Is your business brand new? Has it been around for several years, paying its bills on time while keeping a low credit utilization ratio? Known entities are more likely to get favorable rates versus those without an established credit history.
• Credit inquiries: This looks at how often you’re applying for credit. If you’ve been applying for a lot of loans, it can make lenders less likely to lend to you or provide favorable terms, because they may be worried your business is overextending itself.
Article Source: Forbes
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