Dear Business Banter,
I had a client pay late (without letting me know first!) and as a result, I was late on a couple of payments. Now my business credit score has dipped. Do you have any advice on how I can pick it up again? The faster the better! – Albert
As wonderful as owning a small business is, it can also be stressful. If you don’t get paid in a timely manner, it can put you in the position of falling behind on your own credit accounts. Not only is this frustrating, but it can also have a negative impact on your business credit reports and scores.
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How to repair your business credit score
Business credit reports and scores are more complicated than their consumer cousins, so take the time to understand how they work. The most common are produced by Dun & Bradstreet, Equifax and Experian.
The number of years you’ve been in business, how many credit accounts (credit cards, loans, lines of credit) you’ve applied for in the past nine months, the number of new credit accounts that you have, the amount of debt you’re carrying (especially relative to the credit lines) and any evidence of collections and liens all show up on your business credit reports and are key influential factors in scoring.
However, the way you meet your bills rises to the top of importance. “Payment history is one of the biggest factors in calculating your business credit score, so missing a few payments will tend to have a bigger negative effect,” says Brian Bond, senior vice president of product, marketing and strategy for Experian Business Information Services.
Not what you want to hear, right? Don’t worry. You can recover from the credit score and reputation damage caused by a few late payments by taking action.
Create a financial float
It sounds like you were dependent on this one client for revenue so you could manage your own accounts. That’s a dangerous place to be, so strengthen your foundation.
Arm yourself with savings that you can tap into when times get tough. Business credit builder products are also essential. Consider loan products that can come in handy in situations like these. A business line of credit will allow you to cover expenses, including other debt payments, and pay it off over time.
Unlike with a loan, you wouldn’t pay any interest on it unless you do use the funds. And be sure to have enough available credit with the right business credit cards. Ideally, you want at least a few excellent credit cards in rotation and at your disposal.
Communicate with the creditors in question
Call each delinquent creditor and explain the reason for the late payments and what you are doing to offset that possibility in the future. This isn’t about making excuses, but informing them of what happened and that you are doing what it takes to not let it happen again.
Be aware that discussing the matter won’t change the past, but this communication can set the stage for a good relationship going forward.
Check your business credit report
As with a consumer credit report, monitoring your business reports is your responsibility, so check them frequently. They should show as much attractive data as possible because that is what is used to calculate your credit scores.
Pay close attention to any items in the negative category, so you can identify any mistakes or spot signs of business fraud or identity theft. Consider using a free tool like Experian’s Business Credit Score Planner, which is designed to help business owners improve their business credit scores.
Pay on time, starting now
While you can’t purge any evidence of the late payments from your reports, you can strategize to ensure that positive and accurate information is reported that can offset the damage they’re doing to your scores.
Starting now, make sure every creditor that appears on your business credit report reflects an on-time payment. As those accumulate, your credit scores should rise.
Do business with reporting vendors
Before forming a relationship with a new company, ask if they send account information to the business credit reporting companies. Err on the side of those that do. The more vendors that furnish a positive credit history to your reports, the higher your business credit score will be. Along with credit products, they will give you a business credit boost.
Reduce high credit balances
Review the amount of debt you’re carrying as compared to the amount you can charge. Your balance should not exceed 20 to 30 percent of your credit limit. If it’s higher than that, your business credit scores will suffer, so pay them down as soon as possible.
“The fastest way to begin to improve bad credit is to pay off debts,” says Bond. “A positive impact can be seen on a business credit score by decreasing the balance on business credit.”
Another option is to increase your borrowing power with additional credit lines, so your utilization ratio is in a healthier place.
If you want to work with a third-party company to fix your credit issues, be careful. The best business credit repair companies will have low fees and a high Better Business Bureau rating. Still, with the strategy above you should be able to mend the late payment damage on your own and for free.
Even with the best planning, you may eventually find yourself in a difficult position again. If you can’t send your payment by the due date, contact your creditors before you fall behind. You may be able to work out an alternative payment arrangement that enables you to send less or even none at all for a fixed period of time, thus preventing a delinquency from appearing on your reports.