Like individuals, businesses have credit scores and profiles. Business credit serves as a potent financial tool for companies, helping them to qualify for loans and financing and get financing at viable interest rates. It also fosters relationships with clients and vendors by building trust and credibility for a business.
Unfortunately, many business owners have no idea about the significance of this number. Eventually, they miss out on the benefits a good score offers.
The Federal Reserve Banks’ Small Business Credit Survey reported that a striking 57% of small businesses were in fair or bad financial condition in 2021. The numbers haven’t improved much since then. Most of these companies lag behind in their credit scores, often because of some avoidable mistakes by the owners.
You need to understand that small and unintentional errors with your business credit card can have far-reaching implications. Here are the unexpected blunders you must avoid to safeguard your creditworthiness in the long run.
Blunder #1: Not Starting Off on the Right Foot
Did you know that one-third of new startups in 2022 were launched by first-time entrepreneurs? These beginners might not have any idea about building business credit independently without using personal credit. Both are different, just as you and your business are separate entities. Mixing them up is a mistake you should avoid.
According to eCredable, startups should establish their business credit right from the outset. The good thing is that the process is straightforward. It includes simple steps such as establishing a legal entity, getting an Employer Identification Number, opening a bank account, and proactively managing your score. A proper start can help you build credit sooner than later.
Blunder #2: Co-Signing Someone Else’s Loan
Co-signing loans is a common practice, and most people do it for loved ones. Business owners may do it for friends or employees. On a warning note, your company may land in a tight spot if the borrower fails to repay the loan on time. In such situations, the credit scores of the borrower and the guarantor suffer a significant blow.
Imagine losing your credibility because someone else fails to repay your loan. You can avoid the problem by being vigilant about vouching for someone as a co-signer. Check their financial history and repayment capacity before agreeing to be a guarantor. Even better, avoid co-signing loans unless absolutely necessary.
Blunder #3: Delaying Payments
Delaying payments is a cardinal sin for individuals and business owners looking to safeguard their credit scores from damage. Be on time with all your payments, whether settling the outstanding bill on your credit cards or repaying the loan installments. You have no excuses because every time you miss or delay a payment, your score drops by a few points.
You may easily forget dates amid your daily tasks and deadlines. Technology can be a savior as you can rely on apps and automation to stay ahead of the dates. Set reminders to pay outstanding dues before the due date. The auto-debit feature on your bank account can be of great help.
Blunder #4: Not Checking your Credit Health Regularly
Your credit scores replicate the financial health of your business. Not checking it regularly can be another reason for a drop in business credit. Businesses in the US are given a Credit Risk Score on a scale of 101-992. A lower score indicates a higher risk of delinquency. An average score of around 700 or higher is regarded as a good score.
You must commit to checking this score every three or six months to understand where your company stands and whether it needs improvement. Additionally, it enables you to spot errors in your credit report and get them rectified sooner than later. The relevant credit agency can make the necessary edits to keep your scores on a healthy level.
Blunder #5: Maxing Out Your Cards
Business owners often have multiple credit cards. They tend to maximize their cards, assuming that paying them off will not affect their ratings. Avoid doing so because credit institutions see this habit as a risk. Your scores may fall when things do not look good to agencies.
Using 30% of your credit limit is the best bet. If you go beyond this limit, agencies may foresee a financial problem for your business. Additionally, high credit card bills spell a burden on your budget when you have to pay them month after month.
The Bottom Line
Preserving your business credit should be a top priority because it signifies the financial well-being of your company. Lenders are happy to help business owners with high creditworthiness. Likewise, partners and vendors are comfortable with collaborations. Ensuring a healthy score is as much about avoiding these blunders as it is about following the best practices.