“The only man who sticks closer to you in adversity than a friend is a creditor.”
Now that you’ve established your business and understood the importance of having good credit, there are a number of ways you can build your business credit profile, raise your credit score, and gain more financial flexibility. These are some of the most important ones:
1. Use Credit in the Form of a Credit Card or Loan
The most obvious way to build credit is to develop a solid history through responsible borrowing in ways you see fit that positively impact your business. In the early stages, it may be difficult to get access to larger amounts of capital unless you’ve already secured a business start-up loan, which in itself would be beneficial for your credit score. The name of the game, in business as well as on a personal level, is to obtain credit and ensure that you are using it responsibly. The earlier you start this process the better, as the length of time accounts have been established is a key factor in credit history.
2. Pay off the Balance in Full
Paying the whole monthly balance and not just the minimum payment, is vital, especially in the early years of the business. This demonstrates that the business is healthy and not stretched to its financial limits. If you do find it necessary to carry an ongoing balance, this should be kept at no more than 25% of the limit, to show that your business is utilizing an acceptably low percentage of its available credit.
3. Don’t be Late
It is vitally important to make sure that your debt servicing payments are made either on time or early. If you’re the type of person that is super-busy or forgets things (and let’s face it, we all do from time to time), you’ll be pleased to know that almost all business credit cards give you the option to set up useful reminders 5-10 days prior to the payment due date, just like with personal credit; most will also allow you to set up auto-payments for at least the minimum amount due. Alternatively, you can set your own personal reminders through Outlook or via iOS/ Android. To simplify your life, consider taking advantage of these helpful tools, as a couple of late payments will quickly drag down your business credit score.
4. Continue to Monitor
Knowing your company’s credit score, and tracking changes in it, will give you an early warning as to any unexpected changes and, crucially, enable you to prevent and correct possible fraud. Sign up with a service such as CreditSignal® that will send you alerts when any changes occur to your company’s credit score. As explained in the previous article, the credit rating of a business is heavily influenced by the individual scores of its principals so you should also use a service like Credit Karma to monitor your personal score.
The main aim of building and protecting business credit is to have credit lines available to serve the needs of your successful, expanding business. At this point it’s worth bearing in mind that your business’s ability to obtain credit will depend not only on its credit but on a number of other factors, including its current cash flows, its overall net worth relative to the amount requested, its income history, and the nature of its assets, whether they are illiquid (e.g. real estate) or relatively liquid (cash on hand, stock, some types of inventory). More liquid assets are easier to convert to cash in the event of default. Also a factor is the business’s ratio of assets to liabilities, as this will influence its likelihood of staying solvent while servicing the debt. A lender will obviously prefer not to have to go after assets, as this takes time and can cost money, and would rather a default didn’t occur in the first place.
Although other factors will affect your way your business will be judged as a credit risk, the fact does remain that your business credit rating is one of the most important. Follow the steps outlined in this guide and, over time, your business will demonstrate the creditworthiness that will lead to greater lender confidence and increased borrowing power. Good luck!
For more information on this and other matters related to your business credit, please contact Commander Capital Funding Group today on (888) 748-7731 or firstname.lastname@example.org.