Small business proprietors frequently seek external funding to expand their enterprises. However, a favorable business credit score is imperative to qualify for a business loan and alternative financing.
Business credit scores are vital in enabling lenders, creditors, and suppliers to assess a business’s payment reliability. Understanding methods to boost and maintain your business credit score can help you access larger loan amounts, benefit from reduced interest rates, and potentially negotiate more adaptable repayment terms. Below is a concise summary outlining the characteristics of a commendable (low risk) or unfavorable (high risk) business credit score.
Table of Contents
Keep Your Business and Personal Finances Separate
Certain small business owners combine personal and business finances using a single bank account for both transactions. For instance, they may be tempted to use a personal credit card for a significant one-time equipment purchase.
Nevertheless, intertwining personal credit cards with business finances can impact your credit score, with the specific implications varying based on your business structure. In the case of a limited company, lenders can review your credit rating and those of your business partners and directors to assess risk. Should your credit standing be subpar, you could face reduced loan amounts or even denials.
In the absence of a dedicated business credit card, financial institutions and credit bureaus might scrutinize your credit score to evaluate your creditworthiness. This scenario commonly arises for startups and nascent businesses that lack a substantial track record of financial dealings and repayments.
Track the Credit Scores of Your Business Partners
The creditworthiness of individuals can send shockwaves across entire sectors and supply chains. Keeping a close eye on the credit scores of your primary suppliers and key customers is paramount, as any financial challenges they encounter could impact your business in the future.
If a business partner faces financial issues, explore alternative sourcing options or focus on acquiring new customers to decrease your dependence on their financial stability. This tradeline supply company review looks at the best company that can help you track and improve your business credit score.
Space Out Your Loan or Credit Applications
In the early stages of a new strategic or growth period, there may be a temptation to explore the industry and assess your ability to secure loans or credit informally. However, it is advisable to refrain from doing so. Only apply for credit when essential, as each application becomes part of your credit history.
Submitting numerous applications in a brief timeframe could raise concerns about financial challenges or obstacles in obtaining funding. A practical solution is to request quotes without committing to formal applications until you are certain about the necessity of obtaining a loan or credit line.
Ensure Timely Payment of Your Bills
Opt for timely bill payments whenever feasible. While this may temporarily impact your cash flow and postpone essential purchases, it ultimately benefits your business in the long term. Paying on time helps you avoid interest charges, saving you money. Late payments can harm your credit score and reflect poorly on your credit report, making it challenging to repair.
Creditors prefer clients with a history of meeting payment deadlines. Demonstrating consistent timely payments increases your likelihood of securing financing compared to businesses with a habit of paying late.
Approach Collections Seriously
Failure to pay outstanding bills for an extended duration may result in them being passed to a collections agency. Heed the warnings provided before this step and promptly settle the owed amount or arrange a payment plan. If a collections order cannot be avoided, cooperate with the agency to clear the debt expeditiously. Upon making the final payment, request the agency to remove the adverse credit history associated with the debt from your credit report.
Endnote
Employ the tips above to enhance and uphold your business credit rating. A strong credit score unlocks fresh credit opportunities and assists in obtaining loans on more favorable terms.