Knowing Your Credit Score Can Pay Off
Scott Walker launched Digital Golf, an interactive instructional website, in 2004. Like many small business owners, he relied on personal credit during the early stages of his operation. But if Walker wants to get financing to fund expansion efforts, he needs a solid business credit score.
A credit score is much like a report card. If you pay your bills on time you’ll earn a positive rating. Lenders will offer you preferred rates. If you are financially negligent, you are given poor marks. Those willing to offer financing will impose higher rates and tighter terms. Others, such as gas, electric and cell phone providers, may well deny you service outright. Yet, many small business owners pay little attention to their credit score.
“Many small business owners either don’t know their scores, think they can get around a low credit score, or assume it’s not important to their business. They’re largely misled,” explains Gerri Detweiler, credit advisor at Credit.com and author of The Ultimate Credit Handbook.
The credit report is used as a future indicator of your credit worthiness. Companies compile data and assign scores to individuals and business alike. Some companies, such as Dun & Bradstreet (D&B), often rely on self-reported information from businesses, while Experian depends on third-party information to base its rating.
Experian bases its credit score on three factors, according to Dan Meder, vice president of product management. This includes accounts receivable data provided by vendors and suppliers and public records that provide financial background on incorporated businesses. Personal credit information is also taken into consideration since owners often mix their personal and business finances, particularly those with five or less employees.
Credit rating agencies can unearth a plethora of information such as “financing statements given to an office supply store, liens against your business, judgments against you and bankruptcies,” says Meder.
Experian rates credit worthiness on a scale of 1 to 100. If a small business earns a score of 90 it’s reasonable for a bank to assume that the owner is more likely to repay a loan within in the next 12 months. Lower scores, such as a 30, might be considered a predictor that the person is a potential credit risk and has only a 20 percent chance of repayment.
Take Steps to Establish or Boost Your Credit Score
To establish a positive credit score, experts recommend taking proactive financial measures. Making on-time payments, paying off debt and keeping credit cards in good standing for long periods of time surely help. “Consider taking out a small loan that you know you can repay to establish good credit,” recommends Lawrence White, an NYU Stern professor of economics.
If you have been remiss in repaying a loan or paying vendors in a timely manner, there are also ways you can improve your credit profile.
Don’t overextend your credit line. If you have a $100,000 credit line and have tapped $80,000 of it, slow down and don’t max out your credit.
Generate positive cash flow. Being in the red sends creditors running.
Manage your personal credit carefully. Some credit scoring companies consider small business owners’ personal credit since many commingle personal and company accounts.
Clean up your balance sheet. If you’re running a larger business, you may want to consider selling off non-performing assets thereby reducing your debt, advises Andy Birol, a management consultant based in Solon, Ohio.
Following good business practices is also instrumental. Incorporate your company, obtain proper licenses, establish a separate phone line and start a credit line with an office supplier. The most important thing is proving that your business can pay its bills on time.
Establishing a positive credit score takes about a year or two, according to Detweiler. If you’ve been delinquent in payments or declared bankruptcy, repairing your credit worthiness will naturally take longer.
Boosting your score will not only help you gain favor among lenders and credit card companies, but may well impact the rates you pay for various other financial services such as auto, health and property insurance. Suppliers may offer better terms because your business is less of a credit risk, Meder suggests. If your business falters, it’ll also be easier to obtain funding to tide you over during tough times.
Experts also tell small business owners to check their credit scores at least once each year to spot potential errors or any other discrepancies. While you are at it, you may want to order reports on competitors, suppliers and vendors to gain some fiscal insight. Some bosses also check credit scores for potential employees, especially those who may be involved with accounting and finance.
| Credit Score Resources |
| To learn more about credit scoring, or to obtain a report on your business, competitors or vendors, start with reputable credit scoring businesses. D&B Small Business Solution Equifax Experian |
