5 Tips To Improve Your Credit Score As A Small Business Owner
Credit scores are often among the most significant factors in loan approvals. Businesses with strong credit ratings may have an easier time getting approved for loans and for even higher amounts than those with bad scores. This is why it’s crucial for businesses to learn how to improve their credit score.
With a strong credit profile, you can unlock many advantages and growth opportunities for your business.
If you worry that your credit may not be strong enough, continue reading for our list of steps that could help you improve your business’s score.
With our guide, we aim to help small businesses like yours achieve financial freedom by improving your chances of accessing financial solutions.
Understand Your Business Credit Score And How It’s Calculated
A credit score is a number that indicates either an individual’s or business’s financial situation and health. Your credit score is a measure of your entire debt and credit history. Typically, credit ratings range from excellent to good, fair and poor.
There are three common credit reporting agencies or bureaus in Australia, Equifax, Experian and Illion, that calculate and report credit ratings. It’s important to note that each credit bureau has its own way of calculating credit ratings.
This means there could potentially be slight variations between credit score numbers. Generally, if your credit score is above 660, it’s good, while an 800 or higher score is excellent. The key factors that may affect your credit score include:
- Payment history
- Credit utilisation
- Length of credit history
- Types of credit
- Recent credit inquiries
Moreover, it’s essential to remember that your personal and business credit scores are interconnected. For instance, as a small business owner applying for a loan, if the lender cannot get sufficient information from your business’s credit history, they may look into your personal rating.
Pay Bills On Time To Boost Your Payment History
When it comes to improving your business’s credit score, paying bills on time is one of the most effective steps you can take.
Every on-time payment can contribute positively to your payment history, which is a key factor in determining your credit score.
In order to ensure you boost your business’s credit score, you should maintain timely bill payments, including credit cards, loans and vendor payments.
Missed or late payments may have a negative impact on your business credit score.
Late or outstanding bills appear as defaults on your credit report, which is one of the most serious black marks.
These defaults can make it harder to access credit when you need it, like securing a loan to grow your business or navigating unexpected cash flow challenges.
To avoid this and stay on top of payments, you could set up automatic payments or reminders.
This way, you avoid potentially forgetting about any bills, as you should receive automatic reminders before they are due.
Reduce Your Credit Utilisation Ratio
Keeping your credit utilisation ratio low is a simple yet powerful way to improve your business credit score.
Credit utilisation is the ratio of credit used to available credit. If you’ve got a credit limit of $10,000 and you’ve used $4,000, your credit utilisation ratio is 40%.
In other words, it’s the amount of your credit you utilised in relation to the remaining credit you have available to use. It’s advisable to keep your credit utilisation low to improve your credit score.
Typically, ideal credit utilisation should be under 30%. Otherwise, a higher credit utilisation ratio can impact your score.
Because a high credit utilisation ratio can signal that your business might be over-reliant on credit, which can lower your credit score.
On the other hand, a low ratio could show you’re managing your credit responsibly, which is exactly what lenders want to see when you apply for a loan.
Some great tips for reducing credit utilisation usually include paying down debt or increasing credit limits.
This way, you should ensure you do not max out your limit and ensure space for additional charges.
Reducing your credit utilisation ratio isn’t just about boosting your score—it’s about showing lenders you’re in control of your finances.
And by having a strong credit profile, you’ll be in a much better position to access funding when your business needs it most.
Build A Strong Business Credit Profile
It’s crucial that you build a separate business credit profile from personal credit if you want to ensure a strong credit score.
A solid business credit profile can improve your business’s credibility and access to funding.
This way, you can make a clear distinction between business and personal finances and ensure that one does not impact the other.
Establishing your business credit often involves the following steps:
- Registering with a credit bureau
- Open a business credit card
- Building relationships with suppliers that report to credit bureaus
Regularly Check Your Credit Reports For Errors
Your credit report updates monthly, and typically, the credit reporting agencies must provide free access to your credit report once every three months.
Other instances when you may request a free copy of your credit report include:
- Your business has been refused credit within the past ninety days
- Your business’s credit-related information has been corrected
When you check your report, look out for common errors that may negatively impact credit scores, such as incorrect balances, late payments or fraudulent activity.
If you find any errors, you should do the following to correct them and improve your score:
- Contact the credit reporting bureau (Equifax, Experian or Illion)
- Provide supporting documentation, such as payment records
- Wait for a response after the investigation
- Verify that, once the agency confirms the error, it takes prompt corrective action
Conclusion
Learning how to improve credit score is crucial if you aim to secure funding for your business.
Improving your credit score typically involves several steps. These include understanding your credit score, boosting your payment history and reducing credit utilisation.
Moreover, you should also build a strong business profile and regularly check your credit reports for potential errors.
By implementing all these steps, you may successfully improve your business credit score.
At Lumi, we provide tailored financial solutions designed to empower small business owners to grow and succeed.
We look beyond your credit score and take a holistic approach in assessing your application, with the aim of providing small business owners with fast, fair and flexible funding solutions.
If you’re looking to secure funding for your business, visit the Lumi website or contact us via phone call at 1300 005 864 or email sales@lumi.com.au.
At Lumi, we provide small businesses with the best business loans and lines of credit. In fact, our Business Line of Credit was awarded the Best by the WeMoney Awards 2024.
