How Bad Business Credit Impacts Your Business
One area that can greatly affect a business is credit scores. Having bad business credit will directly impact your company’s ability to obtain lines of credit, reasonably priced insurance plans, utility rates, and supply lines, just to name a few examples. In this post, we’ll further explain how bad business credit can impact your business, and will provide insight on how to improve it.
Business Credit Rating
Perhaps one of the most important components of a new business’s reputation is its credit rating. A new company that ensures its credit rating grows is one that will succeed in the long-term. In comparison, a business owner that neglects its credit may end up with a bad credit profile, which can make growth more challenging to achieve.
What a business credit profile looks like depends largely on the business structure. Open a sole proprietorship, and your personal credit score is directly tied into your business’ credit worthiness. In addition, mistakes you make with your business’s finances will also have a negative effect on your personal credit, and vice versa.
With a standard corporation or an LLC (limited liability company), business and personal credit profiles aren’t linked. Instead, your company’s credit worthiness will depend on its business credit score, which is calculated using different algorithms than personal credit scores, and is measured on a smaller scale.
Although separating your personal and business credit is typically recommended, different credit profiles means added responsibility to ensure that your business credit rating is climbing. However, other business structures may require your personal credit starting out. In this case, you should try to improve your credit.
Business credit scores are calculated by four different firms: Dun & Bradstreet, Experian Business, Equifax Business, and Business Credit USA. The scale they use to determine business credit worthiness is one that moves from 1 to 100. Any score higher than 75 is indicative of excellent credit. Simple, right?
The challenge with business credit profiles is that all information sent to the four business credit bureaus is voluntary. Therefore, it’s up to you as the business owner to ensure that all information about your positive relationships with lenders and credit grantors are sent to the credit bureaus.
Many times, business credit information that gets sent to the bureaus consists of mainly negative data, such as late payments or multiple inquiries. That’s why it’s up to you to ensure the good stuff gets sent over, too!
The Bad Credit Slippery Slope
Having poor business credit is easily done, especially during the initial stages of starting a business. Many factors go into determining a company’s credit worthiness, and any of these factors can have a large impact on your business’ credit rating, making future transactions even more difficult. Below, you’ll find a list of factors that will negatively impact your business credit score.
1. Number of Tradelines
A tradeline is equivalent to a credit line when talking personal credit scores. In business, a tradeline is any record of activity in which credit is granted by one company to another company. This can include credit accounts, business loans, and vendor accounts receivable. If you have too many tradelines open at one time, your business credit can be negatively affected, which limits your ability to secure future tradelines.
2. Unpaid Balances
Unpaid balances often occur when a business experiences periods of struggle, and when they’re reported to one of the four credit bureaus, your business credit score can quickly decline. This affects your ability to obtain new credit, leases, or contracts with other vendors.
3. Payment Profile
Running a business requires attention to detail, especially when managing cash flow and accounting matters. Even if you’re running a successful business, if your bookkeeping is sloppy, and your payments to lenders and vendors are inconsistent, that may appear negatively affect your credit score.
4. Credit Use
Having credit and using that credit can be a delicate balance. If your company is maxing out all available lines of credit, lenders will be less likely to extend your company credit in the future.
5. Profile Over Time
Changes in your profile over time contributes to your creditworthiness. This is bad news if your business credit is on a downhill slope, but if you work at improving your score, that work will start to reflect in your credit score.
6. Public Records
Derogatory public information, such as liens, judgements, or bankruptcies will have a huge impact on your business’s credit, making new loans nearly impossible or only attainable at ridiculous rates.
What you can do to help your business get established with good credit, is make sure all the public information on file federally and with your state is accurate. Make sure you have applied for and been granted a business license, and that all the information about your company profile is correct and up to date as your business grows.
The Bad Credit Effect
Neglect any one of the areas that contribute to your credit rating, and your business is sure to suffer. It can be challenging to qualify for business financing, but if you neglect your credit profile, the consequences will make it almost impossible. Here’s how bad credit can make business tasks more difficult:
1. Higher Loan Rates
Bad business credit will cause lenders to give you higher interest rates than they would if you had a decent score.
2. Inability to Obtain New Loans
With a poor business credit score, other lenders won’t want to risk lending you money when plenty of other businesses with better credit are waiting in line.
3. Higher Insurance Rates
Insurance companies may interpret poor business credit with poor business practice, and decide to drive up your rates to protect themselves while covering you.
4. Vendor Costs
Securing contracts with new vendors may be difficult if your company has a history of late or delinquent vendor payments.
Your company may have to pay higher utility costs because of the poor credit profile associated with your business.
To avoid falling into a bad credit trap, monitor your business credit profile regularly, so that you’re always aware of what your score is. By following the tips mentioned in this post, and being aware of the behaviors that cause a score to decline, you can improve your business’s credit score and run a financially responsible company!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.