Common Mistakes That Can Hurt Your Business Credit Score

A business credit score is a numeric value attributed to the business which reflects its creditworthiness. This means loaning or credit purchasing becomes difficult for those businesses that cannot maintain their credit score. It is even worse if it constantly declines without the owners knowing how or why. A business with a good credit score can gain popularity, respect, and a better reputation among its suppliers, customers and other important stakeholders like investors. Many mistakes can be made unknowingly, which can have drastic effects on your credit score. In this blog we will mention the most common ones and how you can avoid them, to ensure financial success for your business.

Not Monitoring Credit Reports

Business Credit Reports are in-depth documents that give you an in-depth analysis of your business’s credit information which is reflected on your credit score. These reports are a culmination of online public records and business credit and it makes it easier to identify what aspect of your credit activities is responsible for the decline or potential decrease in credit score. It is important to have a credible credit reporting agency generate credit reports for your business regularly so that you can keep an eye constantly and look out for any sudden changes to maintain your credit score.

Late Payments

It goes without saying, but the common business ethic is to keep up with your word, especially if there is a promise to make payments for a loan or credit purchases to suppliers. A bank loan or overdraft must be paid on time since that data is permanently recorded and can impact your chances of getting future loans as banks will find you inconsistent. Similarly, suppliers must also be paid on time because they can also add their record of payments to online databases which will impact your credit score and also destroy chances of future relationships with more businesses who will be hesitant because of your business’s unreliable nature.  Make sure to set reminders for payments to suppliers, or set an automatic transaction for recurring bills to make sure that you don’t have to hassle for cash when the deadline approaches.

High Credit Utilization

Every business has a base credit limit which is determined by its financial standing, assets profitability, etc. It is not a good idea to use this limit to the brim, especially if you do not need it. Credit is a financing option, not a necessity. If you maximize your credit cards, for example, the bank will not be confident in your financial situation. Instead, it would assume that you are maxing out credit cards simply because you need money desperately and your cash flow is not enough to support it. Now you see how high credit utilization can paint the wrong image for lenders. It is recommended to utilize under one-third of your available credit. If you can show responsible behavior by making payments on time, over time your limit may increase, and that one-third will still allow you to get bigger loans.

Low Credit Utilization

This might seem contrary to the previous point, however, if your business utilizes little to no credit, then it will not be able to build a credit history. It will not be able to build a payment history, and hence, it will not be able to show that the business is indeed responsible enough for loans. Without such efforts without actually doing anything your credit score may still suffer. Even one credit transaction and payment per month can be a stable start to building a good credit history.

Relying on Personal Credit

This is another problem common in small business owners, where they do not open business bank accounts and instead use their accounts for their business as well. This can overwhelm your sources and you will not be able to differentiate personal and professional loans. Moreover, it is just simply better to have a business account and use business credit cards. They have higher limits, lower interest rates, and even reward systems which can be of more value for the business. It also means that your credit score will not be affected by your business’s performance financially and vice versa.

Cycling Accounts

Some business owners make the mistake of closing down credit accounts when the debts are paid off and then opening new accounts every time they need a new loan. This may seem like clean accounting, but it means the credit history is non-existent. All of the new accounts will be considered separate and no long payment history will exist to boost your business’s credibility and financial reputation. So, instead, it will lead to a poorer credit score. Instead, it is better to have long-term channels like good relations with suppliers which would mean you can purchase goods on credit for a long time if you pay back on time. This will mean the accounts can stay open and will be regularly used, creating a chain of credit and payment history.

Conclusion

To conclude credit scores can help get your credit applications accepted MUCH faster, but to capitalize the credit scores have to be a healthy number. Whilst there are strategies to improve credit scores, it is important to avoid mistakes that might decline it just as much. So Monitor your credit reports regularly to catch and report errors to avoid a permanent dent in your credit score. Moreover, utilize a moderate amount of credit only, and make sure to pay it back on time to have a positive payment history. Do not mingle up personal and business credit accounts, instead have a separate corporate card and use it for any small payments.