Whether you’re brand-new to business or have been an entrepreneur for many years, your business credit plays a pivotal role in determining the financial health and viability of your company. A strong business credit profile can open doors to helpful opportunities like securing loans at favorable interest rates and establishing relationships with suppliers. However, if your business credit is tarnished due to errors, outstanding debts, or poor management, it can hinder your business’s growth and success.
This guide to cleaning and repairing your business credit will give you a roadmap to improve financial health and increase business opportunities. The journey to restoring your business credit might seem daunting, but with patience, diligence, and the right guidance, it is entirely possible. Read on to learn more about how to move toward financial health and prosperity.
Why Healthy Business Credit Is So Important
Regardless of the industry your business operates in, a clean and healthy business credit profile is crucial to success. A favorable credit score can give you a boost in the following areas:
Favorable Loan Terms
A solid business credit score enhances your ability to secure loans and lines of credit at favorable terms. Before a bank or other lender approves a loan application, they scrutinize your business credit profile to assess the risk of lending money to your business.
If you have a strong credit profile, lenders recognize that your business has a history of repaying its debts on time. They’ll be more likely to extend credit to your business at lower interest rates, reducing your overall borrowing costs.
Potential Investors and Partners
A strong credit profile indicates that your business is financially stable and well managed, which can boost investor confidence in your business. With a solid credit standing, your venture will be much more attractive to potential investors and strategic business partners.
Competitive Edge
In some industries, businesses are required to disclose their credit profiles when bidding for contracts or licenses. A strong credit profile can differentiate your business from competitors and increase your chances of winning those contracts.
Key Considerations in Determining Credit Score
There are a few factors that go into calculating your business’s credit score, including:
- Payment history: Are you paying your obligations on time?
- Credit utilization: How much of your available credit are you using at a given time?
- Length of credit history: How long has your business been using credit?
- Public records: Does your business have any bankruptcies, judgments, or liens against it?
Low credit utilization, a long credit history, and a reputation for good financial management will all work in your favor. They signify that your business is not overly reliant on credit and that you prioritize paying debts on time.
Common Problems With Business Credit
If you find that your business has a low credit score, there could be a few reasons for that calculation. Do any of the following apply to your business?
- You have a history of late or missed payments.
- You are constantly on the verge of maxing out your available credit.
- Your business has a public record of financial distress, like liens or bankruptcies.
If you consider yourself a financially responsible business owner and are confused by your low score, there may be errors or inaccuracies in your credit report. A lender or creditor may have reported your business information incorrectly. Perhaps your business’s name is similar to that of another business that truly is in financial trouble. Or maybe someone has used your business’s information to apply for a credit card and racked up fraudulent charges. If you believe your credit score to be inaccurate, carefully review your report and call attention to any wrong information.
Cleaning Up Your Business Credit
Is your business credit score in need of some cleaning? It may seem like a daunting task, but there are manageable, actionable steps you can take to accomplish this.
Review Your Credit Report
Take a closer look at your business’s credit report. Review it to make sure all the information, including business name, trade styles, and physical address, are accurate. If you notice anything unfamiliar or confusing, reach out to the credit reporting company to dispute any inaccuracies.
Reduce Credit Utilization
Over-reliance on credit can spell trouble for your business in the long run. Your credit utilization refers to the ratio of your current debts to your available credit. Lowering that rate can significantly improve your credit score, as it indicates knowledgeable financial management.
Pay Outstanding Debts
Do you have debts sitting on your record? Pay them off as promptly as possible to avoid paying too much extra interest. Plus, timely payments show potential creditors that your business can be trusted to pay them back, too.
Repairing Your Business Credit
Once your credit score is cleaned up and you have a financial strategy for moving forward, put consistent effort into repairing that score more permanently. How can you set yourself up for future success?
Establish New Credit Lines
Take this step responsibly to avoid falling into the over-utilization trap. If you are confident that you can manage them effectively, apply for new vendor accounts or business credit cards. Make all payments on time and in full, if possible.
Good To Know:
If you’re wary of taking out another loan in your current financial state, look for options within the money you already have. Using a ROBS, or 401(k) small business financing, is a great way to fund your business with your retirement account.
Monitor Credit Utilization
How much of your credit are you currently using? A good rule of thumb is to keep your ratio of debt levels to available credit below 30 percent. Pay as many of your expenses as possible with money you actually have instead of relying too heavily on credit.
Monitor Your Credit Report
Reviewing your business credit report shouldn’t be a one-time occasion. Make sure all your information is accurate and up to date, and dispute inaccuracies as soon as possible with the reporting agency to avoid negative judgments on your record.
Taking control of your business credit is crucial for the financial health of your company. Implement strategies like reducing credit utilization and promptly paying off debts to enhance your credit profile. And don’t be afraid to establish a new credit line if you’re confident you can manage it. Learning how to clean and repair your business credit profile gives your company more chances for financial success.
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