2020 was a challenging year for everyone, both personally and in business. As people lost income and struggled with credit, businesses did too. If your business credit rating has taken a hit as well, it’s time to get back on the right track.
How can you recover your business credit? The steps are simple, but that doesn’t mean they’re easy. Here’s what you need to do to rebuild your credit in 2021.
START WITH YOUR PERSONAL CREDIT
For many small companies, personal credit is business credit. If you’re a solo entrepreneur, you’ll need to manage your finances carefully to get the funding and access you need for your business. Of course, 2020 made that very difficult, and you may have run up some additional credit balances that damaged your score. Take a look at your current financial situation and see what steps you can take to move forward.
One of these steps might involve looking into credit repair services and creating a plan to pay down the debt. Start by using less credit for daily needs. Then, see if you can make payments every two weeks instead of every month.
When your credit is back on the right road, your business will benefit as well.
UNDERSTAND BUSINESS CREDIT SCORES
If your company has a credit score, it’s important to understand how that number is created and what factors impact it. A business credit score is between 0 and 100 and generally measures how risky it is for banks to lend to your company.
The credit score is based on your business size, credit mix, credit balances, and payment habits. Industry norms are also taken into account. If you normally receive payables in 60 days, that will be the standard.
To create a business credit record, your company will need to have a legal structure such as an LLC or corporation. You’ll need an EIN from the IRS and a DUNS number, both of which are free. You also must have bank accounts in the business name.
Over time, the overall habits and records of your company’s borrowing will create a score that lenders will rely on.
CHECK YOUR BUSINESS CREDIT REPORT
Unlike consumer credit reports, you can’t get a business credit report for free. However, it’s worth the price to get your records. You’ll see your business credit score and know where you’re starting. From there, look for errors in your credit report. Are there old accounts listed? Debts you don’t recognize? Disputes that have been settled? If so, dispute the errors or inquiries that are incorrect.
You can also get paid for deleted collections. This is important because if those records remain, lenders will continue to see you as high risk even though it’s paid off.
PAY BILLS ON TIME
While this seems like a no-brainer, it’s the single most important factor in your business credit score. Failing to make payments on time is the definition of being a credit risk.
If it’s a challenge, consider breaking it down into smaller parts. Can you pay the minimums on most accounts and choose one account to make two payments a month instead of one? Even if you pay the same amount, paying every two weeks means you make two extra payments a year.
Make sure your payments are secure, as well. You wouldn’t want more credit damage coming from a hack or stolen financial information. Additionally, avoid paying over insecure Wi-Fi and make sure your mobile device is safe.
A lot of the same strategies individuals use to pay off debt work for businesses as well. You can focus on your smallest debts first and once they are paid off, use the money toward larger debts. However, it may be harder to alter your credit score as a business in comparison to a personal credit score. In this case, reducing your credit utilization may come in handy.
REDUCE CREDIT UTILIZATION
The next biggest factor in your business credit score is how much credit you’re using compared to how much is available. Generally, you want to keep this score under 30%. Although this ratio isn’t a rule of thumb, exceeding this ratio can seriously hurt your business’s credit. However, there are still ways to improve your credit if your ratio happens to be above 30%.
If you can, contact your creditors and see if you can raise your credit limits. Giving yourself a higher limit can actually lower your credit ratio, giving you a lower percentage. If that doesn’t work, focus on using less business credit and paying down the balances as much as you can.
As a last resort, take a look at whether you can take out additional lines of credit such as a loan — but don’t use them! The idea is to reduce your usage of available credit. If either of these options doesn’t improve your ratio, you can also rely on the good word of others.
ADD POSITIVE ACCOUNTS TO YOUR FILE
Unlike consumer credit, not everyone you work with will report their experiences to the credit bureau. Contact the credit bureaus and add your trade references. The more positive payment information you can add to your file, the better. You can also focus on getting references from accounts that report to credit agencies, such as vendor accounts, business credit cards, and more.
You want to help lenders look at your credit report and understand the full picture of what it’s like to work with you. By adding positive references and choosing to work with reporting lenders, your credit report will be more accurate and complete.
NEW YEAR, NEW CREDIT
A new year is a great time to get back on your feet and improve your credit score. When you understand your credit profile, work on making payments, and keep your payment information and identity secure, 2021 can be a much better year.
When you improve your credit, your company will be in a great position to get the funding you need to grow and succeed. Things will get better — here’s to a great new year!