Business credit is quite similar to personal credit in how it works; it acts as a financial scorecard that shows the creditworthiness of your business. A poor business credit rating will deny your business access to cheap credit and in some instances, totally deny it access to credit.
But it’s not just lenders that look at your business’ credit rating to determine whether and how they will interact with it. Your business credit provides insight into your business’ health by showing signs of delinquent payments or bankruptcy which could affect your business’ ability to attract certain types of customers and to build long-term relationships with suppliers.
The good news, however, is that business credit can be improved — and you don’t have to be a financial specialist to do it. It only requires implementing a few simple strategies and your business’ credit rating will improve over time.
Here are five tips to help you improve your business credit rating:
1. Create a separate business entity. A great number of small businesses operate as sole proprietorships. Owners of these businesses fail to incorporate them or register them as limited liability companies. Other than the great risk this puts on your personal credit and property, failure to register your business as an independent entity limits the amount of credit it can acquire. Companies will generally have access to more credit as compared to individuals. Incorporating your business should be the first step you take when working to improve the credit rating of your business.
2. Always pay on time. Make it a habit to pay your company’s debts before the due date as this has a huge impact on business credit rating. The more days before the deadline you are able to clear your debt, the greater the impact. So don’t wait until the last minute to clear your invoices, do it as soon as the cash is available to improve your credit score.
A good way to ensure that you pay on time is to automate your payments as this takes away the stress of having to remember when bills are due. You could also set up payments to directly bill your business credit card so that you only have one statement to review at the end of the month rather than several small ones.
3. Ensure that lenders and suppliers report your payments. You could be paying your bills diligently, but if this information is not communicated to credit reporting bureaus, it will not have any impact on your business credit rating. Encourage suppliers and lenders to report your payment information and regularly check with credit bureaus to ensure the information is being updated.
4. Maintain good personal credit. Business and personal credit might be separate and distinct, but lenders will sometimes look at personal credit ratings for additional information. This is especially common for new businesses that haven’t accumulated enough credit information for lenders to base lending decisions on. Maintaining a good personal credit rating will help you build a solid rating for your business.
5. Limit credit use. Why would you work to build credit just not to use it — sounds contradictory, doesn’t it? Yes it does, but having a high credit utilisation ratio reflects badly on your business credit rating. Work on keeping your utilisation ratio below 30% as this shows lenders and vendors that your company is good at managing debts, hence carries a low credit risk.
Continuously monitor your business credit by analysing your credit reports regularly to catch any reporting errors and other things that could have a negative effect on your rating. You should also keep your company profile up to date with accurate and current information.