The Importance Of A Strong Business Credit Score

The importance of a strong Business Credit Score

The most critical part of any business venture, especially startups, has always been accessing capital. A new business will almost always begin operations at a loss, and it can take a while to actually achieve equilibrium, let alone profits.

As such, access to loans is sometimes perceived as the keystone upon which everything relies; losing access is almost certain to do on a business low on funds. However, how do you determine if you have access in the first place?

That is the sole purpose of the business credit score, the metric that you may find absolutely critical in the near future. Thus, it is time to start thinking about it and setting up a good score to serve as a foundation for your business.

Personal Score Vs Business Score

If you have ever requested a loan, then you are already familiar with the concept of a credit score. Simply put, it is a measurement of the likelihood of the lender being repaid and a representation of borrowing power.

There are some key differences between personal loans and business loans. Compared to individuals, businesses enjoy larger loans and lower interest rates. In addition, a positive rating affects things beyond loans.

Insurance providers often evaluate the credit scores of both owner and business in order to determine the appropriate insurance rates. Vendors and suppliers will also take the credit score of your business into account when determining the terms of payment for goods and services provided.

On the other hand, businesses have to take into consideration things like company size and the circumstances in the business’ particular field. If a particular industry is suffering, then the business delinquency risk will naturally be higher.

Additionally, you will have less flexibility when it comes to checking the credit score of your business. There are plenty of choices for monitoring your own personal credit scores, but you only have very few sources for attaining a free business credit score check.

Unlike an individual’s credit score, a business will have its credit score available to the public. This is in order for lenders and insurance providers to check and provide accurate ratings, as well as for the sake of transparency.

Calculating a credit score

The basic principle for calculating the borrowing power of a business is the ability to pay any debts accrued on time. In fact, payment history is the most important factor, and sometimes the only metric used to determine the credit score of a business.

For example, two businesses take loans for the same amount. One completes all payments on time, while the other one is overdue on a couple of installments. Even though they both will repay the entire debt within the deadline, the second one will inevitably have a lower score due to not being able to fulfill the smaller obligations.

Other factors may be considered, such as paying more than the necessary quota, paying the loan off early, the age of credit history available, and how any previous debt has been managed. Generally speaking, a business that has taken multiple loans in the past and has proven reliable will have an easier time than a startup taking on its first debt.

However, you may find that your own personal score could very well influence your business credit score as a business owner. If you have a record of reliability as an individual, it can serve as an extension of the credit history, even if not related.

Building your credit score

Saying that the best way to improve your credit score is to simply pay your debts in time is an oversimplification. Were it so simple, one would simply request a loan, not use any of it, and then repay it as given.

There are many different factors that can affect your business’ credit score. Even applying for too many loans will negatively impact your business credit reports, as it indicates you are having trouble staying afloat, and therefore have a higher business delinquency risk.

In fact, the actual best way to minimize the perceived business delinquency risk is to establish proper documentation of paying your debts on time. Even the mere act of paying your regular invoices can help you improve your credit. The problem is, not all bills will report towards your business credit rating.

If this is the case, all you need to do is find a way to ensure what you are already paying will report to your credit. You can do this by paying with business credit cards or opening new business accounts, ensuring that they do contribute to your business credit reports.

Finally, another important aspect is to manage your debt responsibly and always avoid maxing out credit lines whenever possible. This will not only hurt your score but may also leave you with no room to maneuver should additional expenses be necessary.

The most important benefit of a good credit score for your business is the fact that it can let you refinance debt more easily should the interest rates become more favorable. It can either let you pay less each month or allow you to pay off the full loan earlier.

Due date calendar with gold coins on top and a digital graph underneath

Start building credit from day one

As with most things in life, it is far easier to damage your borrowing power than it is to build it up. As such, it is far more advisable to take smaller risks and mitigate them consistently. The key for a startup is to begin establishing a reputation of reliability.

Businesses often find themselves at the mercy of a lender, in the sense that an approved loan can be the difference between surviving a rough period and going bankrupt. If your business can demonstrate the ability to always pay in full with no delays, you will have a significantly easier time securing funding

In turn, having access to these additional opportunities will allow your business to expand more comfortably. As a business owner, you will be relieved to always have capital available when performing that critical equipment upgrade, location remodeling or simply having extra working capital during a rough moment.

The Importance Of A Strong Business Credit Score

Read Blog

How to Establish Business Credit, Get Business Credit & Build Business Credit

Read Blog

Trak Credit Monitoring Services: What are the Benefits?

Read Blog