Building and maintaining a business credit score is one of the most useful tasks you can focus on to improve your company's finances and cashflow -- and to fuel growth.
A business credit score is simply a number that ranks a company's creditworthiness. A business credit report is used to produce your company's credit score.
The three major reporting agencies for business credit score are Dun & Bradstreet, Experian and Equifax. Some newer "fintech" companies like Tillful are upending the market with a new type of credit score using a cashflow scoring models. Many large companies have also created their own internal scoring models.
The two most important reasons for building a reputable credit score are:
The most reliable method for improving a business credit score is to pay your company's bills on time. Many suppliers will report your payments -- both on time and late -- to the credit bureaus and agencies. If you don't pay your invoices on time, or are placed into a delinquent status and your company is sent to a collections agency, this will adversely impact your credit score.
We reached out to a dozen or so credit experts for the less obvious but equally important and unique ways to improve your business credit score.
"Establish credit accounts with vendors even if you prefer to pay cash. On-time, in-full payments are good for business credit — and the more, the better. Even if they’re not strictly necessary for businesses that can afford to pay in cash, establishing credit accounts with vendors supports a more robust history of positive payments that should improve business credit over time. Businesses should check their credit reports for missing vendors and contact them to encourage timely reporting."
“Business credit scores are often misunderstood and overlooked by most small business owners, but they are critical if you want to negotiate with your vendors and suppliers for better terms. The most important thing to do – make sure the business accounts you have are reporting your payment activity to as many business credit bureaus as possible.”
“It goes without saying that paying on time will help you get a good score, but what is also important is that you pay consistently. One thing the bureaus will look at, as well as corporations who have built their own scorecards, is your average days to pay and the associated standard deviation. The less consistent your payment times, the higher will be your standard deviation. What the bureaus' scores are looking for is an upward trend in your standard deviation, which is an indicator that your cash flow is periodically being constrained causing erratic payment patterns."
“The simple rule of thumb is that consistency is predictable. Paying consistently lends itself to predictability, while erratic payments do not and so will pull down your credit score.”
"Communication is key. Keep open and regular communication with your vendors, creditors and even the credit reporting agencies about your business status. Creditors often see a change or shut down in communication as a prelude to something bad, and often as a response will begin taking precautions to protect their interest. This becomes a spiral of distrust which leads to uninformed decisions. Companies that are open and transparent may feel naked in-front of their vendors and creditors but will also win the respect and trust that they need to make it through difficult times. "
"It's all about cash flow. Extend your payables if you can without any penalty. If you can get 90 day terms while having your customers pay 30 days that should improve your cash flow and your turnover ratios. Keep lines of liquidity open and unused. Make sure they're committed lines of liquidity. Having an uncommitted line doesn't give much confidence that your banks will be there when things go bad. If you do use your credit lines, pay them off before the end of the quarter. Either you're printing or burning cash. Improve your cash flow to improve your credit score."
"If you expect to fall behind in payments, talk to your suppliers and other creditors so that they do not put a lien or other charge against your company. Most business owners I speak to say 'I wish they had called me first' when they come across a charge. People want to avoid the lawyers and courts if they can. Just communicate."
"When it comes to earning good business credit scores, it's important to make sure the information on your business credit reports is accurate. Those reports are what your business credit scores are based on in the first place. If incorrect negative information appears on your business credit report, it could damage your business credit score—perhaps significantly. Thankfully, you can dispute errors on your business credit reports."
"The number of tradelines and length of payment history are two key factors that have an important impact on your business credit score. A strategy often overlooked is to automatically or manually add your existing business accounts and utility accounts to your business credit reports. For example, Business Credit Builders allows you to link up to 8 business accounts, plus securely download up to 24 months of payment history directly from your service provider’s website."
"It is often said that 'asking for forgiveness is better than asking for permission,' however in the world of managing risk, you are far better off being made aware of a potential threat or risk than finding out after the fact. A client who approaches their lender and brings to light a potential risk or covenant breach will be rated far better than the one who only waits until the bank finds out by themselves. This is because the client displays honesty and has an ability to forecast and understand their underlying business risk drivers."
"Assuming that a business is solid, well run and in the right industry, lenders like quality contracted revenues. If a substantial portion of revenue is contracted or subscription-based, this can give lenders good future revenue visibility. To further improve the credit risk profile, a business should consider contracted revenues in parallel with proactive operating working capital management. The idea is to generate funds from the operating cycle, resulting in operating working capital that does not require financing. This is important because any improvement in operating working capital position results in a positive impact on the operating cash flow."
"It’s common for your business credit profile to be old or just inaccurate, and just like with personal credit, mistakes could greatly affect your loan approvals. It can be benign like volume or address, or more serious like a non-existing lien, or a non-existing late payment. Both Experian and Dun & Bradstreet business credit bureaus have dedicated pages to guide you to fixing, updating or disputing your information. You should contact Experian and D&B to get a current copy of your report and find what may need to be changed."