A line of credit can create a huge opportunity for your law firm, providing you with extra capital whenever you need it for growth, operations or other expenses as they arise.
However, before you’ll receive approval for funding, the financial institution reviewing your application will to want to analyze your personal and law firm credit reports and scores to assess the risk in working with you. This is because credit scores are one indicator of your firm’s financial health and the likelihood that the loan will be repaid in full.
Here’s a quick guide to business credit scores and how you can improve them.
- Understand how business credit scores work
First and foremost, it’s important to know the basics of business credit and how your credit score is determined.
Your business credit score is similar to your personal credit score in that it’s a measure of creditworthiness and tracked by three of the major credit reporting agencies—Equifax, Experian and Dun & Bradstreet.
Unlike your personal credit score, your business’s rating is publicly available and is measured on a scale from 0 to 100 (as opposed to 300-850).
As a general rule, lenders consider a score above 75 to be good and anything over 90 to be excellent. Keep in mind, however, that while your personal score is determined by using a standardized FICO algorithm, your business credit scores aren’t—meaning that your firm’s score can vary significantly from agency to agency.
- Check for report errors
Since business reports are publicly available, you can easily look up your firm’s credit score. If you’re unhappy with the result, examine the report for errors. Sometimes the underlying data may be incorrect and catching these mistakes is a simple way to improve your score.
Generally, credit rating agencies rely upon payment information from vendors, banks, data-gathering companies and credit card issuers. Despite assurances that the information is carefully vetted, errors can occur and you’re in the best position to find and fix them.
If you do spot inaccuracies in your report, contact the credit bureau directly.
- Take control of your finances
One of the most effective ways to improve your firm’s score is obvious—pay invoices on time. However, this can be difficult, if not impossible, when your income is contingent upon the outcome of your cases—a problem that is exacerbated when there are delays in distributing your legal fees.
If you have a credit line in place, you can smooth out your cash flow with proceeds from the funding and assure that trade and other debt is paid on a timely basis. Also, try finding creative means to pay your bills when you’re experiencing liquidity issues, such as determining whether there are certain expenses you can pay later or can be paid over time, which won’t negatively impact your credit score.
- Decrease your credit utilization ratio
Another tip to improve your business credit score is to decrease your credit utilization ratio—the amount of revolving credit you’re using divided by the total amount of credit available to you.
Most of the credit rating agencies take your credit utilization ratio into account when determining your score, and they suggest keeping the ratio of credit used in relation to the credit available under 15%.
You can keep your credit ratio low by paying your bills off in full (or as low as you can manage), making multiple payments per month, and by increasing your credit limit on your business credit cards.
Maintaining a good credit score is vital to securing reliable financing for your firm. Even if you don’t plan on taking out a loan or getting funding anytime soon, building business credit can improve your ability to receive financing in the future and can help you negotiate better deals with co-counsel, vendors, insurance carriers and more. Being aware of your score and finding ways to improve it is beneficial no matter what your circumstance.