The outbreak of COVID-19 in 2020 left many individuals jobless and struggling with credit, with this same impact felt by businesses worldwide. Now that the world is gradually going back to normal; you might also be thinking about how to improve your credit score in 2021 if it had taken a hit. It is something you shouldn’t ignore, as having a good credit score is an excellent gauge of your company’s financial health.
Banks and other financial institutions use your credit rating information to assess your creditworthiness and decide whether to offer credit to your business. However, maintaining and improving your credit score is a massive challenge for many business owners.
So, if you’re curious about how you can improve your credit score in 2021, look no further.
Table of Contents
1. Understand How The Business Credit Score Is Calculated
One of the first things you should do before you learn how to improve your business credit rating in 2021 is to understand how this figure is arrived at and the different factors that affect it. Factors that affect this score include;
- Credit balances
- Size of your business
- Credit mix
- Age of credit history
- Duration in business
- Industry size
- Outstanding debts such as credit cards and loans
- Payment history
Understanding these factors is crucial because commercial credit bureaus such as Equifax, Experian, and Dun & Bradstreet use creating business credit reports. It’s also vital to comprehend this because credit bureaus use different formulas to compute your credit score.
2. Maintain A Low Debt Utilization Ratio
Another thing considered by credit bureaus when computing your credit score is your debt utilization ratio, which refers to the percentage of credit used to concern the available credit. The ideal debt utilization ratio should be 15%, even when you’ve got numerous lines of credit. There are various techniques through which you can achieve this, including;
- Increasing your credit limit
- Opening a new line of credit
- Clearing your balances
- Reducing your credit card spending
By maintaining your debt utilization at 15%, you won’t be overstretching your credit. With that said, a higher credit utilization ratio is also accepted, but it shouldn’t exceed 30%; otherwise, your credit score will start to deteriorate.
3. Pay Bills On Time
Running a business means you most likely have a hectic schedule filled with lots of day-to-day responsibilities. Because of this, it’s easy to forget some of your bills on time. You must never make this mistake because it’s a good business habit and improves your business credit scores. Therefore, you should settle all your payments at all times to utility companies, vendors, landlords, or lenders, on time.
There are a couple of useful tips you should follow to ensure you always make timely payments, including;
- Set aside one day each week to manually clear all the bills
- Use a spreadsheet to monitor your accounts payable
- Clearing invoices immediately after getting them
- Put in place automatic online payments for recurring expenses such as monthly debt repayments and utility bills
4. Establish Credit
When starting a small business, you might not need credit because you can finance everything. But as your company expands, you’ll most likely need help to propel the growth of your business further. If you don’t have an already established business credit, you may get disqualified from getting a business loan.
With this in mind, you need to open several credit accounts and slowly start growing your credit history. You may do this even when your company doesn’t need a loan because; business credit scores are linked to your credit history most of the time.
5. Don’t Close Old Business Credit Cards
It’s tempting to remove your old credit accounts from the credit report after settling your business loan. However, it’s advisable not to do this. It means all the years you spent managing your credit card balance will go to waste. It leads to your credit score suffering because there won’t be sufficient credit history to be factored in when computing your credit score. In addition, the deficiency in credit history is seen as a sign of stability, thereby meaning it’s easier to win the trust of vendors and suppliers.
If you have several business credit cards, you must close some, and it’s best only to stop the latest ones. This way, your credit score won’t suffer too much because of less credit history.
Takeaway
A good credit score is something that many entrepreneurs dream of achieving, as it’s a great indication of your company’s financial health. It is because your business credit rating affects your ability to get a loan and the interest rates. If you have a challenge bettering your business credit score, this guide has highlighted beneficial tips to improve your credit rating in 2021.
