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How to recover from a business credit score drop

If your business’s finances are not stellar, your business score may slide – here’s what you can do to improve it

Summary

A good business credit score is key for securing access to credit and growth opportunities. If your business credit score has dropped, there are several steps you can do to bounce back. This is where to start.

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There are plenty of things your business needs to succeed, including a good business credit score.

Your business credit score can influence your ability to be approved for vendor trade lines, business credit cards or small business loans. It can also determine the terms at which you’re able to borrow money.

Maintaining good business credit hinges largely on practicing the right habits. Losing points could make it harder to borrow if you need capital for everyday expenses or growth investments.

If you’ve seen your business credit score slide, here’s what you need to know about getting it back on track.

See related: 6 ways to maintain a good business credit score

What can cause business credit scores to drop?

Your business scores are drawn from your business credit reports.

“Business credit scores are determined based on what kind of business you own and your payment habits,” says Lizzie Parmenter, consultant for bookkeeping and advisory service Tower Books.

The four major companies that furnish business credit scores are:

  • Dun and Bradstreet
  • Equifax
  • Experian
  • FICO

“Like with personal credit scores, these companies focus on payment history and credit utilization rate,” says Leslie Tayne, business and personal debt resolution attorney and founder of Tayne Law Group in Melville, New York.

The individual calculations used to arrive at business scores are different, however, as are the factors that may result in a score drop.

“Your Dun and Bradstreet commercial credit score will drop as your probability of delinquency increases,” says Parmenter. This score predicts the likelihood that your business will pay its bills on time.

Parmenter says the Dun and Bradstreet financial stress score, which measures the likelihood that a business will cease operations in the next 12 months, can drop if an unpaid loan owed by the business is settled by a creditor or your business folds without paying its debts.

Your Experian business credit score, meanwhile, “will drop if you have outstanding loans, liens or judgments against your business,” she says.

Likewise, a business bankruptcy filing can also be detrimental to your score.

See related: How to check a small business’s credit report

Vendor trade lines can aid business credit score recovery

Your vendors can be instrumental in bouncing back from a business credit score drop.

“You want to build strong relationships with suppliers and vendors to encourage them to report timely payments to credit bureaus,” says Parmenter.

In addition to payment history, vendors and suppliers can also report additional information to the business credit bureaus, such as:

  • Total credit limit
  • Trade line utilization
  • High and low credit balance

How frequently vendors report this information to the credit bureaus largely determines how much of a benefit you’ll see in your business credit score.

Some vendors report monthly; others report quarterly or annually. Monthly reporting would obviously produce faster results.

If you’re applying for new tradelines, keep in mind that vendors may be reluctant to extend credit if your score has bottomed out. Be prepared to support your application for vendor credit with strong revenues and/or a personal guarantee, which would make you personally liable for any resulting debt.

When opening new trade lines or rebuilding business credit using old ones, make sure the payment terms are a good fit for your cash flow.

“Payment history is more specific with business credit,” says Gerri Detweiler, education director for Nav, a business credit education site. “If you miss a payment by just a couple of days, that will likely be reported as late.”

Negotiating Net-30 terms, for instance, can give you a little more breathing room than Net-15 and make it easier to avoid late payments.

Rebuild business scores with a business credit card

One important thing to consider when your business credit score declines is how your personal credit score may be affected.

“Business credit and personal credit data are kept separate, even in the cases where the credit reporting agency collects both types,” says Detweiler.

Detweiler says ordinarily, business credit doesn’t negatively impact personal credit but there can be an exception if you default on a business debt.

“If you sign a personal guarantee for business financing, the lender may report a default to your personal credit,” she says.

If your personal credit scores were unaffected by a negative change in your business credit score, opening a business credit card is another way to repair the damage.

Tayne says the best ways to do that are the same as managing a personal credit card: making payments on time and maintaining a reasonable credit utilization ratio.

Choosing a business credit card for rebuilding credit

It’s important to be strategic when applying for a business credit card to avoid hurting your personal credit in the process. Each new inquiry for a business credit card will show up on your credit report, potentially knocking a few points off your personal score.

Keep these rules of thumb in mind as you review business credit card options:

  • Know what type of credit the card is suited for – i.e., fair, good, or excellent.
  • Check your personal credit reports and scores before you apply.
  • Tailor card options to your spending habits. For example, if you can’t commit to paying in full monthly, you may want to rule out business charge cards altogether.
  • Consider whether the card requires a personal guarantee.
  • Read the fine print to learn which account activity is reported to the business credit bureaus.

Those tips are useful from a business credit score perspective, but in general, it’s also helpful to review things such as rewards, fees and the card’s annual percentage rate.

Here are some of the business credit cards you may consider as you work on raising your business credit score:

If you have poor credit, your options may be limited to a secured business credit. These cards require a cash deposit, but they can be a stepping stone to an unsecured business card if you pay the bill on time and keep a low balance.

See related: How to make the transition from secured to unsecured credit card

Use business credit monitoring to look for score-building opportunities

Like personal credit monitoring services, business credit monitoring services can track changes to your business credit reports and scores. These companies offer business credit monitoring services:

Nav’s service is free; Experian and Equifax both use a paid subscription model.

Whether free or paid, enrolling in business credit monitoring services can be helpful in spotting signs of fraud, which could be damaging to your score.

Having an overview of your business credit monthly can also help you to pinpoint things that could be dragging your score down, such as unpaid vendor tradelines.

Tayne says monitoring your credit regularly can reduce the odds of your score being damaged by an error. “Reporting inaccuracies can help remove negative impacts from your score,” she says.

She suggests checking your business credit report yourself if you don’t want to sign up for credit monitoring. These sites offer free business credit reports:

As for frequency, checking your business credit scores and reports monthly or quarterly can help you track the progress you’re making in raising your score.

Be sure to get credit where credit is due

Your efforts to reestablish a good business credit score may go unrewarded if creditors or vendors aren’t reporting your account activity.

“The most important thing to understand as you rebuild business credit is that not all lenders or vendors report to commercial credit agencies,” says Detweiler, and those that do may not report to all the business credit reporting bureaus.

If you’re using a mix of vendor trade lines and secured or unsecured business credit cards to improve your score, be aware of which ones report positive account activity, including on-time payments.

“Checking and monitoring your business credit is the best way to understand which ones report,” says Detweiler. “While it takes time to recover from a credit setback, business owners are often pleasantly surprised to see progress relatively quickly if they start paying on time going forward.”

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Published: May 20, 2019

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