While most business owners understand how important it is for them to have excellent credit, very few know the basics of business credit. In fact, one survey showed that 72% of all business owners in the U.S. don’t know their business credit score. A big reason is that the secrets of business credit are rarely discussed; this is a shame as businesses tend to be heavy users of credit. As such, here are some business credit secrets every owner needs to know.
A Brief Introduction
Similar to your personal credit score, the creditworthiness of your business is being graded by credit agencies and there are five reasons why your business credit score is important.
First, it affects the maximum loan for which your business qualifies. While some banks & funding companies will offer small business loans to those with no credit, most banks require a high credit score for approval. Even if you are approved with a lower credit score, you will have to pay higher interest rates due to your credit score and this will cost you more money over time.
Second, your suppliers will access your business credit to calculate whether they will extend trade credit to your business. This can impact your ability to purchase inventory on credit from a supplier.
Another way business credit is used is by insurance companies. These company will look at your business’ credit score to determine how much they will charge you for premiums. This might sound unfair, but insurance companies believe that policyholders with poor credit tend to make riskier decisions.
If you are looking to gain government contracts, then you want to make sure that you keep a close eye on the creditworthiness of your business as most tenders will include minimum credit score requirements.
Finally, an excellent business credit record helps to protect your personal credit as it reduces the necessity to use your personal credit for your business. Remember, businesses are heavy users of credit, so if you are relying on your personal credit cards, then you are playing with fire.
What Goes into Your Business Credit Score?
Ok, so you have found out your business credit score but now you want to improve it. As such, you need to know what goes into calculating your business credit score. These factors include your business’ Credit Utilization Ratio, payment history, length of credit history, outstanding debts, public records, the size of your company, and any risks related to your industry.
Many of these criteria shouldn’t come as a surprise as they are like how your personal credit score the two differences are company size and industry risk. However, this shouldn’t come as a surprise as the focus of your business credit score is your business.
While each credit bureau looks at this information they are constantly tinkering with their algorithms. For example, some reports claim that payment history accounts for roughly half of a business’ credit score. While FICO’s SBSS also looks at financial reports and the owner’s personal credit record.
Now to the elephant in the room. When just starting out, your personal credit history plays a major role in determining your business’s credit score. This makes sense as your business is new and there isn’t much information to go on. As such, you want to make sure you have a firm understanding on your personal credit score when you are setting up a new business.
This highlights the need to take steps to separate your business credit from your personal credit early on. Doing so will help your business and it will ensure the risk to your personal credit is limited.
Secrets to Maintaining Your Business Credit Score
Actually, the ‘secrets’ are no secret at all. First, make sure that you pay your bills on time. If you can’t pay the entire balance on time, then make sure you make the minimum payment.
Second, use your credit but don’t overuse it. Remember, credit agencies look at your Credit Utilization Ratio – that is the amount of available credit you are currently using. If your utilization ratio is more than 70%, then you might have problems getting additional credit. As such, you should consider reducing your outstanding credit balance.
Lastly, you want to make sure that you regularly monitor your business’ credit score. This way you can find any issues early on and get them corrected. One of the biggest problems with business credit is confusion between two businesses with similar names, so by monitoring your score, you will know if something is being misreported. Remember to take care of your credit and it will take care of you.