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7 Ways Small Businesses Can Build Strong Credit Scores

7 Ways Small Businesses Can Build Strong Credit Scores

Alex Roha

23 Aug 2022
5 minute read
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Quick: What’s one key for small businesses to gain access to potential financing?

Whether the funds are for unforeseen expenses, the management of ongoing cash flow, or long-term growth, a business credit score can unlock essential insights for lenders, vendors, and suppliers into the reliability of a company’s financial strength. It’s as important as a personal credit score.

Solid business credit may also help business owners apply for small business loans or financing and help secure more favorable terms. And because there’s no requirement that companies notify a business owner when a credit check is initiated, it’s the responsibility of the small business to be aware of its credit history.

Different Types of Business Credit Scores

To begin building credit, a small business must first establish a unique credit identity, specifically with business credit reporting agencies. The “big three” business credit bureaus that will report to banks, vendors, or suppliers are Dun & Bradstreet (D&B), Experian, and Equifax. However, how each commercial credit bureau views the information can vary.

  • D&B looks at operational information and trade payment history that takes into account multiple types of scores rolled into one. For instance, D&B will look assign a viability rating that evaluates a company’s future health as well as a failure score that predicts the likelihood a company will seek legal and monetary relief. D&B will finalize all its scores on the PAYDEX 100-point scale.
  • Equifax takes data collected by the Small Business Finance Exchange (SBFE) and transforms it into a report. A sample of Equifax credit data includes a synopsis of a company’s credit accounts, all public records, risk scores, and a payment trend and payment index on a 12-month scale compared to industry norms.
  • Experian takes a critical look across both suppliers' and lenders' data to tabulate its report. The bureau will assess any credit risk for extending terms, monitor a business’ ability to pay and adjust credit terms, payment history, lien and bankruptcies, and the credit position a business holds relative to other creditors.

Experian also generates a Financial Stability Risk Rating that measures the risk of a company going into bankruptcy or severe financial distress within the next 12 months. This rating ranges from 1 to 5; lower ratings indicate lower risk.

What Affects a Business Credit Score

When credit bureaus begin to tabulate scores, they’ll most likely consider the following factors:

The number of years the company has been operating. Business credit lines––also known as credit inquiries—the company applied for in the last nine months. New lines of business credit opened and the number of business lines of credit used in the last six months. Such lines include cards, invoice accounts, loans, or leases. Any collection amounts or tax liens in the last seven years. Overall payment history that reflects how often payments were made on time.

How to Improve a Business Credit Score

Some forms of credit data will affect a business longer than others. For instance, Experian reports that simple trade data stays on a business credit report for 36 months. Bankruptcies, on the other hand, may last almost 10 years.

There's no quick fix for a poor score; however, new and small businesses can take several steps to establish good credit and improve future growth.

  • Make payments on time (or early). Payment history plays a massive role in establishing creditworthiness, and every credit bureau will consider it. Net terms—a business system that sees vendors and suppliers fronting businesses with vital inventory and deferring payments—is also a form of credit, so falling behind on these can potentially harm a score.
  • Work with vendors and suppliers that share data. If a small business owner makes payments on time, that data should be easily accessible to credit bureaus. Some vendors may automatically send payment history, but company leaders may need to prompt others. The more positive feedback on a company’s payment performance, the better the score.
  • Avoid multiple credit applications. Checks from lenders on small business credit scores appear on every credit report. Multiple credit applications in a short period can indicate financial difficulties. Parse these out over time to avoid negative hits.
  • Minimize your credit utilization ratio. Credit utilization ratios measure the difference between the amount of credit available to a business and the amount that has been used. The generally accepted rule is that a business should use less than 15% of its available credit. Clearing balances, decreasing spending on credit accounts, and increasing the overall credit limit can all help lower this ratio.
  • Apply for a retail credit account. Retailers offering office supplies, computers, building supplies, electronics, etc., also provide revolving store credit accounts for business customers. Using this form of credit at all the retailer’s locations can help establish additional trade references for the business, which they can then use on future credit applications.
  • Establish simple operating expenses. The Small Business Administration (SBA) recommends small businesses working on a shoestring budget take into account everyday reoccurring payments that are easing to manage, such as business phone lines, Web hosting, and monthly marketing and advertising expenditures.
  • Apply for a corporate card. A business credit card is one of the quickest ways for a small business to build credit history; it also helps keep personal and business purchases separate. With corporate cards, finance leaders can set spending limits down to a very granular level, which helps small business owners establish corporate credit they can comfortably pay back on time each month.

Introducing Navan Expense

With a solution like Navan Expense, small business leaders have much more control over spend. That’s because program administrators can tailor the controls to be as specific as each company needs—even down to the individual employee.

By establishing good business credit, small businesses can position themselves for more favorable payment terms with suppliers and vendors, reduce the number of times prepay transactions occur, and bolster chances for better interest rates and credit terms.

Think of building business credit as building relationships with other companies and institutions. The more effort put into building the relationship, the more budding businesses get out of it.

Ready to start using Navan today? Get up and running in 5 minutes.

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