Yesterday, Part I of this two-part article on small business credit basics touched briefly on the differences between personal and business credit and how important they both are to any prospective or existing small business owner’s ability to borrow money.
Today, we’d like to provide home-based and other small business opportunity seekers and franchise owners with some simple steps they can take to build or boost their business credit score more specifically:
Look for creative ways to build a history…
• In building a portfolio that speaks to your credit-worthiness, start small with trade/vendor accounts. These are non-revolving accounts for products and services where you pay at the end of each billing cycle. Use these contacts as references in obtaining a small business credit card.
• Obtain a small business credit card with a very small limit. Use it sparingly and maintain a low balance.
• Put all debts in the business’ name, not your personal name.
• Once you’ve established a line of small business credit of any kind, do not let it sit idle. Use it and use it wisely.
Fulfill your obligations…
• Pay your taxes in full and on time.
• Adhere to compliance measures, such as regulations, state and federal licensure requirements and permits, etc.
Actively manage and analyze your business credit reports…
• Pay attention to the ‘negative’ category. Look for sloppy mistakes, signs of fraud or identity theft, outdated information, etc. The fastest way to boost your score is to clean up your report and to repair any damage you can as soon as possible, keeping in mind that legitimate negative information stays on your record for seven years.
• Make sure any vendors you work with report in to the business credit bureaus. Even one good report that you are paying on time will increase your score. Additionally, if you are behind in payments and once you catch up, make sure that is reported as well.
• Order your business credit reports once or twice a year to assess any changes, and check on them quarterly to make any corrections. Requesting business credit reports will not affect your score.
• Update your reports routinely with as much positive information as the bureaus will allow, and know that no one else is obligated to accurately report your credit information. The burden to ensure it’s all correct is on you.
Mind your debt-to-equity ratio (aka how much your business is worth as compared to what you owe)…
• A lower debt to equity ratio is better than a higher one, so always keep that in mind.
• Keep the use of your available credit to 20% to 30% of the maximum allowed across the board.
• Avoid applying for additional credit cards if you owe a lot of money, and pay down your balances as soon as possible.
• Don’t close accounts that have a decent history. It will reduce your overall amount of available credit, which could then affect your ratio.
• Spread existing balances across cards evenly at the 20% to 30% level if at all possible.
• If you are maxed out, transfer balances to cards that offer a lower interest rate, or take advantage of transfer offers that don’t require new or additional lines of credit.
Pay ahead of time and other tricks…
• At the very least, maintain a history of regular, on-time, minimum payments every month. Pay in full whenever you can.
• Given the way Paydex works, paying in advance will raise your score consistently over time. Bottom line, paying not just on time but ahead of time matters.
• Consider taking on investors. Funds from investors don’t count as debt the same way that loans do. This is an easy way to bolster your assets without increasing your debt load.
• Take out a small yet manageable loan of no more than $2k to $3k, and take only 2/3 of the required term to pay it off.
Click here to view Part I now!