How to Improve Your Business Credit Score After Debt Problems

If your business has struggled with debt in the past, it can negatively impact your business credit score. A low credit score makes it harder to get approved for financing and can result in less favorable loan terms. The good news is that with some time and effort, you can take steps to improve your business credit score. Here are some tips to help boost your business credit after debt problems:

Pay Off Debts and Reduce Balances

The quickest way to start improving your credit is to pay down existing debts. This lowers your credit utilization ratio (the amount you owe compared to your total credit limit). Shoot for getting your credit card balances below 30% of the limit. Paying off collection accounts and tax liens will also help improve your score.

Pay Bills On Time

Payment history makes up a significant part of your business credit score. Set up reminders to pay all bills before their due dates. Being late on payments will negatively impact your score. Automate payments so you never miss a bill.

Check Credit Reports Regularly

Errors on credit reports are common – make sure to check your business credit reports from Experian, Equifax, and Dun & Bradstreet at least every 3 months. If you find mistakes, dispute them immediately in writing with the credit bureau. This can improve your score.

Open New Credit Accounts

Applying for new credit can seem counterintuitive when rebuilding credit. However, opening new accounts responsibly demonstrates you can handle more credit. Apply for a small business credit card or ask vendors for net payment terms. Make payments on time.

Become an Authorized User

If another business you trust adds you as an authorized user to their credit account, it can help improve your business credit score. Their positive payment history gets added to your credit reports.

Offer Collateral

Providing collateral, like cash deposits or business assets, can help secure business financing even with poor credit. It gives lenders security in case you default. Over time, making payments builds your score.

Get a Cosigner

Asking a business partner with good credit to cosign financing can improve the chances of approval. Their creditworthiness offsets the risk of your poor credit. Make payments on time to avoid hurting their credit.

Improve Your Personal Credit

Many lenders look at your personal credit, especially when starting a business. Pay personal debts, dispute errors on your consumer credit reports, and lower balances. Your personal credit profile impacts your business credit.

Request Goodwill Adjustments

If you defaulted on debt due to unusual circumstances, ask lenders for a “goodwill adjustment” to remove it from your credit reports. Explain the situation in writing and ask politely. They may approve it if you’ve been a long-time customer.

Wait for Negative Information to Fall Off

Late payments stay on your business credit reports for up to 7 years. Defaults and collections fall off after roughly 4 years. As this negative information ages, it hurts your score less. Time is on your side.

Don’t Close Unused Credit Accounts

It can be tempting to close unused credit cards or lines of credit, but this actually hurts your credit utilization ratio. Keep accounts open, even if inactive.

Hold Off on New Applications

Each credit application causes a hard inquiry on your credit file. Limit applications while rebuilding your credit – too many inquiries can negatively impact your score. Wait at least 6 months between applications.

Join a Trade Association

Trade associations provide educational resources to help improve business credit management. Membership also gives credibility to your company.

Get a Business Credit Builder Loan

Designed to help improve poor credit, these loans give you cash upfront that’s deposited into a locked savings account. You make monthly payments over 1-2 years to “pay back” the loan and build positive payment history.

Incorporate Your Business

Forming a corporation, LLC, or other formal business structure helps separate your personal and business credit. This makes it easier to rebuild business credit independently.

Don’t Take on New Debt

It can be tempting to rely on credit when cash gets tight, but new debt makes it harder to improve your credit score. Find other options like asking vendors for extended payment terms.

Rebuilding your business credit takes diligence and patience, but taking these steps can help improve your credit score over time. Monitor your progress frequently and continue employing credit best practices. With improved credit, you can secure the financing your business needs to thrive again.

References

How to increase your business credit score in 5 steps – Funding Circle. (2023, August 31).

5 Ways to Increase Your Business Credit Score – Fundbox. (2023, August 23).

How to Improve Your Business Credit Score. (2021, May 6).

Improve Business Credit with Help from Experian.com. (2023, September 27).

How to Improve Your Company Credit Score – Fleximize. (2023, September 22).

Business Credit Score: What It Is, How It Works, and How to Improve It – Investopedia. (2023, September 19).