For many people, there are few topics more confusing than credit scoring. Sure, lots of people understand how to get and maintain good personal credit, but many business owners are not aware that their business has a credit score; let alone what they need to do to build and maintain it. This can be troublesome when your business is in need of Equipment Finance or other types of Commercial Lending. If that’s you, don’t worry. You’re not alone. Here are five things you should know about your business credit score.
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You need open tradelines.
Just like with your personal credit score, you need to show that you are responsible with money in order to increase and maintain your business credit score. The best way to do this is to have credit extended to you and for you to pay it as agreed. Simple, right? Tradelines are credit accounts and can include Equipment Finance Loans, Equipment Leases, Commercial Term Loans and Lines of Credit, Credit Cards, Commercial Real Estate and more. Start early in your business to establish these tradelines so that you can establish good history. It will go a long way toward making your business credit score healthy.
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Always be on-time with your payments.
This is really a no-brainer, but it’s the number one thing that people get wrong. Consider setting up automatic payments if you haven’t already. If you accidentally miss the due date, contact the bank immediately and get it resolved. Sometimes banks do not report to the credit bureaus if you pay within a certain grace period. But, ultimately, be vigilant about paying on time every time.
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Your industry matters.
This one sometimes surprises business owners. Yes, in fact, the industry you operate in can influence your business credit score. If you are in a riskier industry (as determined by the credit bureaus), your score will likely be weaker as a result. There is not much you can do about this aside from offsetting it with your strength in other areas (such as history).
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Keep utilization relatively low.
This is another principle from good personal credit habits. Utilization is a measure of revolving facilities (i.e. Commercial Line of Credit) that is simply your current balances on such tradelines divided by the amount available. So, if you have a business credit card with a limit of $50,000 and you have a balance of $25,000 your utilization is 50%. Always remember, it’s best to keep revolving facility balances low and continually pay them off on a monthly basis if possible. Lines of Credit and Credit Cards are meant for short-term needs such as working capital. If your credit need is longer-term, it’s best to use a term loan facility such as Equipment Finance or Commercial Term Loan. This will increase your chances of having a more favorable business credit score.
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The business credit score isn’t everything.
Your business’s credit score is certainly not something to ignore. Most financial institutions, when assessing your business for commercial financing, will rely heavily on your financial statements. This is a good time to mention how important it is to keep accurate and detailed financial records. Well prepared company financial statements paint a helpful picture of your business’ success and your ability to service loan obligations.”
At the end of the day, business credit scores are not entirely different from personal credit scores. The most important thing is to ask yourself this question: “What kind of habits and trends would I want to see if I were going to lend my business money?” You usually can’t go wrong with that guiding principle. And after reading this, you’re well on your way to growing, improving or maintaining your business credit score. You can also get more detail on business credit scores here.
-This material is intended for general information purposes only and does not constitute legal advice. For legal issues that arise, the reader should consult legal counsel.
