11 Apr
B2B Partner Collaboration: Fostering Financial Literacy Among SMBs
From Basics to Brilliance - B2B Support for SMB Financial Mastery.
A high business credit score indicates creditworthiness and makes it easier to get approved for different financing programs.
When businesses apply for loans from any lender, approval depends on many factors. First, a company’s current financial standing will play a significant role in the final lending decision.
Moreover, an organization’s current prospects, business model, and projections for future growth will impact a lender's decision.
Outside of financial standing, though, it’s a business’s credit standing that will most impact a lender’s final decision on a business loan application.
Your business’s credit is its ability to make a purchase then pay for it later. A good business credit rating makes it easier to borrow money or make credit-based purchases.
A high business credit score indicates a business’s creditworthiness, illustrating the level of financial risk taken on by any potential lenders when approving a loan. The higher your score, the likelier it is you’ll repay your debts on time.
When your business credit is good, you’re far likelier to get approved for financing options, offering a quick fix when your company needs immediate funding.
By having a stellar credit score, your business is likelier to receive:
When your credit score is high, lenders can trust that you’ll make timely repayments. Many lenders also offer lower interest rates to high-credit business borrowers, saving you money on your financing options.
Banks and lenders aren’t the only reason you want a stellar credit score. Good business credit enhances the likelihood that you’ll receive trade credit from your vendors and suppliers.
Your vendors and suppliers are also likely to offer superior repayment terms when your business credit is good. A strong business credit score tells these entities that you’re a reliable client.
These relationships, which can only exist when you have good business credit, allow you to seamlessly stock up on inventory, buy equipment, and make other crucial investments. That rings true even if you’re having cash flow problems at any given time.
When your business credit is good, you don’t have to worry about dipping into personal financing options to fund your company.
In a perfect world, you’d never mix business and personal financing or credit. Yet, nearly 50% of small businesses use personal credit cards. Taking on these substantial expenses increases your credit utilization ratio (which we’ll discuss later) and will damage your personal credit score.
Part of the reason business owners rely on their personal credit is that their business credit is too low or non-existent. They can’t get approved, so they rely on personal loans since there’s no other option. Additionally, a survey from less than a decade ago cited 45% of small business owners not knowing they had a business credit score.
Keeping your personal assets separated from business is integral to long-term financial health. However, you can only maintain this separation by first knowing about business credit and learning how to improve your business credit score.
The major bureaus out there need to know your business exists to provide you with credit reports.
Here are some necessary steps to take:
Business credit reports are widely available, provided by major institutions like Equifax and Experian (we’ll delve more into these agencies later).
You typically have to pay for these reports, but it’s an investment into maintaining healthy credit. If you don’t track your credit, you’ll struggle to improve it because you’ll remain uninformed and unaware. Measuring your credit score and understanding your business’s credit history gives you a starting point to build on while flagging potential issues.
It’s understandable to have anxiety about finding out your score. Nobody likes getting bad news. However, knowledge is power. Knowing your business has a less-than-stellar credit score is anything but negative. It’s the first step toward getting back on the right track and taking control.
These reports are specific to your business and typically offer insights to bolster your credit score. They provide you with a roadmap to get your business in good standing with lenders. If your score is low, you’ll learn which accounts are doing the most damage. You’ll also discover any disputable items negatively impacting your credit, giving you some immediate fixes.
A building block of a thriving credit score is making your payments on time.
Conversely, being late paying your bills will have the opposite effect. Tardiness on payments undermines all other efforts to improve a business’s standing with lenders.
To be fair, this suggestion can be easier said than done. Even before the pandemic, 61% of small businesses suffered from cash flow problems, meaning they didn’t have the money to keep up with bills.
Also, payment due dates don’t always coincide with when money comes in.
An extra week or a few days can often provide the necessary breathing room to pay on time. If you face this hurdle, talk to your credit issuers and ask to move the payment dates. You might even be allowed to select your own due date online.
Don’t be afraid to ask for some due date flexibility. These companies want to get paid, and the worst they’ll say is no.
If cash flow isn’t an issue and missing payments is a matter of forgetting because of your busy schedule, auto-pay can be your savior. Credit card companies specifically offer the automatic option, and it’s worth investigating if it’s available for other recurring bills.
We’ll reiterate, though, auto-pay is only a viable option if cash flow isn’t an issue.
When you divide the sum of all your balances by the sum of all your business credit card limits, you get your credit utilization ratio (CUR).
Imagine you have two business credit cards, both with $50,000 limits, and you owe $10,000 on one and $20,000 on the other. To figure out your credit utilization ratio, you’d calculate $30,000/$100,000 for a credit utilization ratio of 30%.
While you don’t want a credit utilization ratio to go anywhere over 30%, it’s actually suggestible to not go over 10% nowadays to be an ideal borrowing candidate. A solid middle-ground score is 15%.
Here are some tips on how to keep your credit utilization ratio in check to bolster your business credit:
A red flag for potential creditors is not having enough credit history. Sure, you won’t have any unpaid debts, but you’ll lack viable proof that you’re a reliable borrower.
So, you need to find scenarios where you can convey your business’s high level of creditworthiness.
Your suppliers with which you share a positive, fruitful payment relationship can be a huge help. Investigate if you can establish a credit account with them. From there, this tactic leads to more positive payments turning up on your file, likely improving your business credit score.
Now, there’s a finesse to asking for credit from suppliers and vendors, even if you have a good relationship with them. For example, don’t ask for net-30 credit (the ability to pay up to 30 days after receiving a bill) right away. Start with asking for net-5 or net-10 credit.
Then, once you receive supplier credit, be sure to make your payments early and in full to ensure the healthiest results for your report.
There’s a caveat to the previous section. While many vendors offer credit, not all these companies report and share payment data with the relevant agencies.
However, it’s possible to manually add trade references to your company’s credit report via the relevant reporting agency. Then, as these positive payment experiences keep piling up, your business will keep looking more favorable to lenders and creditors.
Business credit reporting agencies are many things–infallible isn’t one of them. They’re prone to mistakes just like everyone else.
Fortunately, these agencies are more than happy to hear you out if you want to remove negative feedback from your credit file.
Doing your due diligence on these reports is vital to your business’s credit score. It ensures all the information is properly updated and accurate. You’ll notice blips on the radar like unpaid accounts and hard inquiries that appear inaccurately and adversely impact your report.
When you notice something incorrect on your report, call the agency and dispute the error. Doing so will almost instantaneously give your business credit score a healthy boost.
Do you have any debts that went into collections? If so, once you’ve made the necessary payments, ensure the agency removes the negative account from your credit report.
You’ll need to ask outright for these accounts to be deleted. By keeping silent, it won’t matter that you paid off the debt because it’ll remain a detriment to your credit score, showing a negative account history.
Paying off the negative account can only positively impact your score when it’s scrubbed from your history.
The four authoritative business credit scores and reporting agencies are:
Each of these scores will look different for your company. These agencies all use different scales. One agency’s good score is another agency’s poor score.
FICO is the most relied upon credit ranking system for most lenders deciding on Small Business Association (SBA) loans and similar applications. The loan amounts are generally up to $1 million.
However, FICO isn’t a credit bureau. It combines all the information from Experian, D&B, and Equifax, offering a more well-rounded report.
Also known as the LiquidCredit Small Business Scoring Service (SBSS), FICO assesses a business’s credit history along with the owner’s personal credit history. On top of that, FICO evaluates information about a company such as:
Businesses receive a FICO score between 0 and 300. As your company’s score gets higher, it’s viewed as less of a financial risk for lending. A minimum FICO SBSS credit score of 160 is usually necessary to satisfy the scrutiny of the SBA’s pre-screen process.
It is possible to have good business credit without having good personal credit.
However, having poor personal credit doesn’t make anything easier for your business when applying for loans. Sole proprietors will often be subject to personal credit checks to ensure their reliability when managing debt.
Your personal credit history is most impactful when you sign a personal guarantee for a small business loan. Signing this guarantee makes you personally liable for a debt, which is best avoided because it puts your personal assets at risk.
Again, you can build your business credit without having good personal credit. Still, bad personal credit is a problem best avoided by any business owner.
Good business credit will make your life as a company owner drastically easier when applying for a business loan. However, a less-than-stellar score doesn’t mean you won’t be able to wrangle any financing.
In certain instances, banks can be forgiving if you’re transparent about your poor credit.
Don’t try to hide your poor credit because the bank will find out. You’re better off being up-front, and your lender might find more behind the score, which could be the impetus to approve your application.
Moreover, if you get approved for financing with bad business credit, expect a slower lending process. Your company’s financial documents will be under increased scrutiny, and your application will require further approvals.
You’ll also be subject to higher, sometimes unaffordable interest rates in getting approved for a loan with bad business credit.
Borrowing, like anything in business, is a strategic decision. Provided the only loans you can get are high-interest with inflexible terms, it might be better to say no.
Conversely, when you have good credit as a business owner, it’s a valuable tool that creates growth opportunities and streamlines operations.
There’s always the need to be careful and ensure your projections are accurate. However, once the due diligence is complete and you feel confident about your ability to pay off a business loan, there’s no reason for any hesitancy.
Putting in the research makes getting a business loan like any other investment into a B2B service. You’re taking a calculated risk that you’re expecting to pay off in the long run.
Lenders will always weigh a business’s financial standing. A company being flush with funds has a clear signifier that it’s likely to pay back a loan.
But your business’s financial standing isn’t the only factor that proves your reliability as a borrower. By following the tips offered above, you can bolster your credit score and become far more appealing as a business loan applicant.
Is your business credit score so low you feel like there’s no way out?
Well–there’s no reason to give up. Many organizations run into problems with their credit and dig their way out. Staying focused and disciplined will slowly but surely rejuvenate your business FICO score and get your company back in the running for viable financing options.
Want to learn more about business lending and how to help your customers secure the needed funding?
Contact Loanspark today. We’re happy to answer any questions you may have about business loans. And we’re even more excited to point you in the direction of new and exciting growth opportunities.
