As a small business owner looking to expand, or an entrepreneur with a startup idea seeking a launchpad, financing – at the right time – can make or break your business. To evaluate whether to finance a business, most lending entities rely on the company’s business credit score.
A business credit score, in essence, is much like a personal credit score that tells banks and other lending entities how likely it is that a business will pay back its loans. A higher score indicates a company’s responsible borrowing history, repayment on time, and sound financial health. It is also a representation of the company’s future and its creditworthiness – Will it do well enough to pay dues, or is the company likely to default on repayment? Is it worth the lender’s while to give the company a loan? All this, in many ways, is decided by a number ranging from 300-900.
A high credit score – 700 and above – can open several avenues for your company. You can avail loans relatively quicker and at a lower interest rate. The high score assures lending entities that your business has a history of paying its dues back on time and that it will continue to do the same with their loan. However, companies with average or lower credit scores might be evaluated with more scrutiny. Often loan applications are rejected or might be approved with considerably higher interest rates. Clearly, having a high business credit score is akin to a golden ticket that eases your business’s future growth to realise its true potential!
But don’t let low scores discourage you! Several other legitimate funding options are available today – like merchant cash advances, especially for businesses with low credit scores. Click here to know more about merchant cash advances, which can help you get a much-needed supply of funds, at the right time, to put you back on your feet.
In fact, it is surprisingly easy to mess up your business credit score. A single missed payment, borrowing too much, or adverse public records could be the slippery slope that lowers your score, plunging it into a downward spiral. Of course, that is not the end of the world! It is difficult but not impossible to course correct and improve your business credit score. By following a few simple top practices and being mindful of your credit practices, you can improve your score and maintain it. Here are 5 ways to do it right.
Register your company as a business entity
Though it seems self-explanatory that you need to establish your company as a business entity, it is surprising to note that most small businesses are run as sole proprietorships or fledgeling businesses. If your company is not officially registered as a limited liability company, lending entities don’t consider it separate from you, the owner. This means lenders might end up using your personal credit score to evaluate your business’s health. In the long run, this is a recipe for problems. Start off on the right note, and create a separate identity for your business. Get a business bank account and federal Employer Identification Number – your business’s social security number of sorts – and make your business contact information publicly available.
Keep tabs on your business credit score
Start by analysing your credit report and understanding its components. It is essential to know what your score is and monitor it regularly. In fact, your course of action depends on it. Maybe you already have a good score, and you simply need to maintain it. Maybe your score has dipped, and you need to figure out why. Perhaps there is incorrect information that is affecting your score. In that case, alert the concerned authorities. The idea here is to continue actions that boost your credit score and avoid doing anything that makes the number plummet; you will only know if you regularly check your reports.
Never miss a payment
Missing the payments is one of the most common ways to mess up your business credit score. In fact, in a business context, it might even help to pay your dues early. This indicates proactivity and improves your score. Some credit scoring firms only assign perfect scores to businesses that pay before time! The longer you continue paying your loans off before time, the better your score becomes, giving your business a favourable perception and creditworthiness.
Once you have a control over your current business credit score, you can plan ahead. This includes monitoring all your credit and adjusting future credit. For instance, you could try increasing your credit limit. Acceptable credit utilisation is between 25-30%, but the ideal is 15%. So, increasing your limit gives you more room to stretch if you need it. When possible, close off existing debt or limit new credit till your utilisation is normalised. You can also try and pay twice a month to reduce your utilisation further. Planning ahead also helps you manage cash flow in a way that allows you to pay your dues ahead of time, boosting your score in the process.
Ensure a clean public record
Your business’s public records include bankruptcy claims, tax liens, court judgments and rulings, debt collection lawsuits, UCC filings when company assets are pledged as collateral against a loan, etc. These can also have a substantial, negative impact on your business credit score, so keeping your public records clean is essential. In addition to missed payments, public record-related issues can stay on your credit report for years – sometimes as long as 7-10 years!
The thing about good business credit scores is that you have to stay on track, consistently. It’s all about doing the correct things over and over again; there is no quick fix to improve your scores. However, while you’re working on getting better scores, don’t disregard funding options available for businesses with lower scores. Some lenders are more willing than others to evaluate your business based on the company’s current financial health instead of long-winded historical data.