Do you own a business with open credit? If yes, you certainly have a credit score. As you may know, your business credit score is vital to its health and success.It significantly impacts the amount of financing your business can secure.
For instance, financial organizations like NBFCs and banks thoroughly assess a business credit score before sanctioning loans.
Your business credit score is your organization’s financial health report card. It enables lenders to verify and evaluate the creditworthiness of your business and helps them decide whether to offer you credit.
Typically, lenders ascertain your credit score by considering various factors like the repayment of loans, overall debt value, length of credit history, and more. Hence, the higher the numerical value of your score, the higher the chances of your business to avail of loans at competitive interest rates, let alone better loan deals.
So, if you want to invest in infrastructure or equipment, expand your operations, or improve the business’s cash flow, you must have a good credit score. Still, you don’t need to fear if your business has a less-than-stellar credit score. This article will discuss the four tips, following them will help you improve your business credit score in no time.
Monitor Your Credit Report
The first step to improving your credit score is to know where you stand. For this, it is important to regularly monitor your business’s credit report by obtaining it from national credit bureaus like TransUnion, Equifax, or Experian. Reviewing your credit report helps ensure that all your business information is properly disclosed, accurate, and up-to-date.
For instance, the FASB (Financial Accounting Standards Board) has released a new standard, i.e., ASC 842 lease accounting, that impacts how companies report their lease obligations on their financial statements.
However, most businesses often fail or neglect to reflect this information on their balance sheets, leading to inaccuracies or errors. The standard requires companies to recognize their lease agreements on balance sheets as liabilities and assets than just disclosing them in footnotes as was under the previous standard, ASC 840.
While implementing these changes reflects the financial ratios, such as debt-to-equity and interest coverage ratios, they may also affect your business’s creditworthiness.Also, they help investors and lenders interpret the change in financial ratios and the associated risk of default or reduced profitability.
So whether you are a company with many operating leases or not, always ensure disclosing all the information accurately by monitoring your credit report regularly.
Pay Your Bills on Time
Another no-brainer and one of the easiest ways to get squared away on your credit score is to pay the bills on time. On the other hand, if you fail to pay the bills on time, your credit score is most likely to suffer. Also, any additional step you take to improve your business credit score will quickly be canceled out because you are still at debt risk.
Just like repaying your credit card bills and EMIs on time is crucial to improve your credit score, the same goes for a business credit score. However, if you are habitual in making late payments, it negatively impacts your credit score. Consequently, it becomes detrimental when applying for a line of credit, business loan, or business credit card.
One way to ensure timely payments of your bills is to set up reminders or schedule payments to ensure you never miss them. It will help you improve your business credit score and establish good relationships with creditors and other vendors.
Reduce Your Credit Utilization Ratio
The credit utilization ratio reflects the amount of credit used compared to the total amount available to you. It means a high credit utilization ratio can negatively affect your credit score.
It is also one of the main things many credit reporting agencies look for when determining credit scores. In fact, after payment history, your credit utilization ratio is the second most crucial aspect in FICO Score calculations. Thus, it is typically a good idea to maintain your ratio under 15%.
Moreover, some ways can help you improve your credit utilization ratio. For instance, some of the most recommended ways to improve the ratio are to increase your credit limit, pay off your balances, open a new line of credit, decrease credit card spending, or pay your bills twice a month.
A good rule of thumb is to keep your outstanding balance at 30% or even less of your total credit limit. Once done, you can start working on whittling it down to even 10% or less—an ideal figure to keep the ratio down while improving your business credit score.
Avoid Canceling Old Accounts
Lastly, one of the smartest ways to improve your credit score is to maintain your oldest accounts. These accounts establish when you first start building your credit history. Thus they help improve your business’s creditworthiness. Having a good length of credit history helps show lenders or investors that you have a long track record of maintaining and using credit responsibly.
In other words, the older the account, the better it is not to cancel and hang on to the credit card. Most businesses make the mistake of closing their old credit accounts. Having an old credit account or credit card reflects stability and shows the trust vendors and suppliers have in your business.
However, if you have multiple business credit cards and wish to cancel out a few, it is always recommended to cancel the latest ones. It will create only a minimal impact on your credit score. Since credit age makes up around 15% of the total credit score, closing your old accounts can easily bring down the score. Therefore, even if you do not use a line of credit, keep it open as it can help mature the credit age.
Final Words
The credit score of your business is more than just a number. It is a factor that plays a significant role in the overall success of your business. It demonstrates resilient financial health and strong credit history, allowing firms to expand and grow while establishing credibility.
While there are many ways to establish a good credit score for your business, monitoring your credit report, maintaining your credit utilization ratio, paying bills on time, and keeping old accounts are some of the most recommended and fastest ways to improve your business credit score.
So, if you need a strong credit score to secure your next big business loan, don’t fret and follow the tips above. It will not only help you improve your business credit score but will also help you close better loan deals with competitive rates. Good luck!
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