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How to Recover From a Business Credit Score Drop

Updated on:
Content was accurate at the time of publication.

Seeing your credit score drop can be scary, especially when you may be running a business that may need capital soon. But with time and good behavior, you can bring your score back up. Here are some tips on how to recover from a business credit score drop.

What is a business credit score?

Unlike a personal credit score, which is calculated on a scale from 300-850, a business score is calculated on a scale from 1-100. A score above 75 is generally considered excellent, according to Mary Ann Strout, senior product manager for Experian Business Information Services.

“Every bureau has their own proprietary models for calculating business scores and each are a bit different,” Strout said.

Bureaus that track business credit include Dun & Bradstreet, Equifax and Experian. You can check your score by purchasing a business credit report from one of them. Options include:

Though it can be helpful from a liability standpoint to structure your business as a corporation or LLC, it’s not required for establishing a business credit report and business credit score, Strout said. Businesses that are sole proprietorships can also have business credit reports and business credit scores.

“The most important thing for a business owner of any size just starting out is to be visible and act like a business by establishing the accounts they create (i.e. business utilities, leases, credit cards, financial loans, lines of trade credit, etc.) in the business name, rather than in a person’s name,” Strout said. “The minimum information required to model a business credit score is the presence of at least one trade line or financial payment experience reported to the bureau.”

What can cause your business credit score to drop?

Just like with personal credit scores, payment history is key to maintaining a healthy business credit score. Making payments late or defaulting on debts are two big ways to ding your score. Another one is utilization — how much of your available credit you’re using.

Other incidents that can hurt your business score are tax liens and court cases against your business, said Krista Tuomi, an entrepreneurial finance expert and a professor at American University in Washington, D.C.

“Defaulting is pretty much the biggest one,” said Tuomi.

Ways to improve your business credit score

1. Use credit wisely

Khary Scott, vice president of business development for Capital One Small Business Card, recommended business owners take these steps:

  • Pay often and early.
  • Encourage your partners and vendors to update your payment history regularly to the credit bureaus.
  • Dispute incorrect information on your credit reports.
  • Keep trade lines open.
  • Apply for and use business lines of credit, such as a business card.

These steps can keep your business credit report in good standing and “could help make your business more creditworthy in the long term,” Scott said.

2. Ensure your vendor trade lines are reporting

Businesses can establish lines of credit with each other — for example, if an office supply store lets your business run a tab when purchasing office supplies. Talk to your vendors and ask if they report your payment history to Dun & Bradstreet. If they don’t, then ask them to start if they do that for other customers.

3. Find ways to improve cash flow

“Get caught up on paying your bills,” said Elaine Pofeldt, a personal finance expert and author of the book, “The Million-Dollar, One-Person Business.” “That’s easier said than done of course, but if you’re in a situation where you’re maxed out, you want to think about bringing revenue to the business quickly so you can pay [debts] down so you’re at a reasonable level.”

Some things to examine are:

Invoicing. Make sure to send out invoices as quickly as possible. The sooner an invoice goes out, the sooner the clock starts ticking on a customer’s deadline to pay you.

Deposits. If you run a professional services business, and you haven’t been requiring deposits, consider this an opportunity to start doing so.

Incentives. Think about offering customers a discount if they pay up front, or pay within a certain amount of time.

Costs. Check for recurring costs you can trim, such as unneeded software.

“Maybe you’re paying $100 a month for something you don’t really use,” Pofeldt said.

4. Monitor your business credit

As you take steps to improve your business credit score, you’ll want to keep an eye on it to ensure what you’re doing is actually working.

“Credit scores aren’t static and are constantly changing,” Strout said.

One way to monitor your business credit is via Experian’s SmartBusinessReports, which has options for multiple report plans, each providing varying levels of detail. Costs range from $39.95 per report to $1,995 per year.

As you work to improve your score, you should bear in mind that it’s not a quick process.

“After a business owner has made a conscious effort to improve business credit, understand that it will take time,” Strout said. “The negatives that lower a business score can stay on a credit report up to seven years and can harm a business credit score depending on the factor and its weight in the predictive score model. It is important to continue to monitor the information that credit card issuers have reported and try to avoid applying for additional credit cards.”

The bottom line

If you see a drop in your business credit score, look at ways to improve cash flow, such as invoicing quickly, requiring deposits, offering incentives to customers who pay up front and trimming costs. This will give you a chance to pay down debt and reduce any big balances you may have on  business cards or loans. Finally, lean on your vendor relationships. Make sure your trade credit is getting reported to Dun & Bradstreet and Experian, so your business gets credit for good behavior.

It can take some work, but bumping up your score can save you money over time.

“Rebuilding credit is so worth it in the long run,” Tuomi said. “Better credit scores add up to so much more cash flow since they generally mean lower interest rates.”

Fees mentioned in the article are accurate as of the date of publishing.