If you’re a small business owner, making sure that you have enough capital is vital for the business’s survival. At some point, you may have to apply for financing from banks and alternative lenders to keep up with the business’ day-to-day expenses and other business initiatives like renovations and expansion. However, before you can qualify for a business loan, lenders may need to assess whether or not you have a good business credit score or not.
One of the biggest factors that can affect your ability to take out a business financing is your business’ credit score. The higher your credit score is, the better your chances are at qualifying for loans with flexible terms (i.e., low-interest rates).
In this article, we’ll outline what you can do to maintain a good business credit score. Before that, let’s define what a credit score is first.
What is a Credit Score?
Credit scores are three-digit numbers that tell how creditworthy an individual or business is. Banks, alternative lenders, and other financing organizations use it to assess the risk they’re facing when lending to you. Credit scores range from 300 to 850. According to Experian, a score of 670 or higher is considered a good credit score, while a credit score of 800 or higher is exceptional.
Borrowers with a good credit score are considered low-risk borrowers. On the other hand, subprime borrowers are those businesses with credit scores less than what banks or other lenders regard as a good credit score. Typically, this type of borrowers will have a hard time qualifying for loans with better and favorable terms.
Establishing and maintaining a good business credit score is vital for businesses because it makes it easier for them to apply for financing to manage and run their business effectively. Whether they’re planning to expand their services or product line, invest in new equipment, or open a new location, a good business credit score always helps.
How to Maintain a Good Business Credit Score
Now that you know the importance of a good business credit score, here are five steps you can take to maintain it:
1. Separate Business and Personal Accounts for Good Credit Score
One of the first things you have to do if you’re a start-up business is to create a separate account for your business. This way, you can apply for credit solely for your business and build your business credit score from there. Aside from that, separating business from personal expenses also makes it easier for you to account for your taxable income and tax returns when the tax season comes.
Having a separate account for your business also ensures that your business’ credit score won’t be affected should negative events affect your personal finances.
2. Check Your Credit Report for Discrepancies
You’ll be surprised, but many business owners (especially start-ups) don’t know their business’ credit score until they apply for business financing. It’s worth noting that it’s highly recommended to check your credit reports regularly. Not only will this keep you updated with your current credit standing, but it will also help you detect any discrepancies in your credit report.
You can easily obtain a copy of your credit report in one of the major credit bureaus in the United States. If you spot some errors on your credit report, be sure to call the credit bureau immediately so they can investigate and resolve the issue immediately. No matter how simple, these mistakes can lead to a decrease in your credit score, affecting your ability to apply for business loans in the future. The sooner you address the issues in your credit report, the better it is for your credit score.
3. Pay Your Bills On or Before the Deadline
One of the best ways to keep your credit score within the ideal range is to always make repayments on time. A late payment can lead to a 180-point deduction in your credit score, and the record stays on your credit report for at least six years. When lenders and other creditors see that you have a history of late payments, this may give them the impression that your business is struggling to make repayments. This, in turn, makes you a risky borrower in their perspective. Although you may still have a chance to get approval for the loan, the financing terms won’t be as favourable as when you have a good credit score.
To avoid late payments, set-up a monthly reminder on your calendar. Set the date to days before the actual deadline of the payment. You can also make use of tools like QuickBooks to automate payments to your suppliers and lenders to avoid late payments.
4. Keep Old Accounts Open
Even if you’ve paid off a particular credit card account, it’s always a good practice to keep it open, given that you’re not paying a lot for its annual fee. Your credit history will play a significant role in the lenders’ decision if you’re applying for a business loan. Longer and flawless credit history will reflect good credit behavior, thus increasing your chances of business financing approval.
In general, the older the account is, the more significant its impact will be on your credit rating. Closing old accounts also erase your credit history and limit the available credit at your disposal, thus increasing your credit utilization ratio (CUR).
5. Keep Credit Utilization Ratio(CUR) Below 30%
Your credit utilization ratio measures how much credit you’re currently utilizing and your available credit as of the present. It’s among the most crucial factors that affect your business credit score, so pay attention to it if you’re aiming to maintain or improve your credit rating.
Ideally, you should aim for a lower credit utilization rate. The lower your CUR is, the higher your credit score will be. As a good rule of thumb, you should aim for a credit utilization ratio of less than 30%. In other words, if you have a combined credit limit of $50,000, your total credit balance shouldn’t go over $15,000. A higher CUR can give lenders the impression that you’re not good at managing the available credit you have. This makes you a less than ideal candidate for business loans.
If you’ve exceeded the 30% ideal CUR limit, one way to decrease it is by paying off some of your loans to increase your available credit and decrease your CUR. Another alternative is to open another credit card line to increase your credit limit and decrease your CUR. With the latter option, you have to be careful with your spending and ensure that you can still pay off your balances.
Establishing a good credit score is vital for any business. The key to maintaining or improving your business’ credit score is to know how it works and what steps you need to take to keep it at a range that lenders find ideal. If you don’t know where or how to begin, the steps mentioned above are just a few of the many to get you started.
With a good credit score, you’ll have better chances of qualifying for business loans or credit cards without personal guarantees. This lessens the risk of you having to give up your personal assets as repayment for the business loans if your business goes under.