Small businesses rely on credit to secure financing, purchase inventory, and invest in growth opportunities. A strong credit score is essential for accessing the credit needed to sustain and grow a small business. Below, we will provide an overview of the importance of credit scores for small businesses and offer tips and strategies for building and maintaining a strong credit score, whether you’re looking for loans for small businesses to use imminently, or you’re looking to improve your position for the future.
Understanding Credit Scores
A credit score is a numerical representation of an individual or business’ creditworthiness, calculated based on credit history and other factors. The three major credit reporting agencies in the United States – Equifax, Experian, and TransUnion – each calculate credit scores using their own methods, but the most commonly used credit score is the FICO score.
A FICO score ranges from 300-850, with higher scores indicating a lower risk of default and greater creditworthiness. A score of 720 or higher is generally considered “good” and will likely qualify a small business for the best rates and terms on loans and other credit products.
Why Is Your Credit Score Important?
So, now we understand credit scores, it helps to know a bit more about why they’re so important. Here are a few points to consider if you’re wondering whether you need to boost your credit rating and why.
Access to Financing: One of the most important reasons for a business to maintain a strong credit score is that it can help the company secure financing when needed. Lenders, such as banks and other financial institutions, use credit scores to assess a business’s creditworthiness and determine whether or not to approve a loan or credit line. A strong credit score can also help a business secure more favourable terms and rates from lenders.
Ability to Obtain Better Terms: A business with a strong credit score is more likely to be approved for loans and credit lines, and is also likely to be offered better terms and rates. This is because lenders see the business as less of a risk and are more willing to lend money at lower interest rates. This can save a business a significant amount of money over time and can help the company grow and succeed.
Establishing Credit: A strong credit score can also help a business establish credit in the first place. When a business is just starting out, it may not have a credit history, which can make it more difficult to secure financing. By building a strong credit score, a business can establish a credit history and demonstrate to lenders that it is a responsible borrower. This can make it easier for the business to secure financing in the future.
Mitigating Risk: A strong credit score can also help mitigate risk for a business. When a business has a strong credit score, it is less likely to default on loans or miss payments. This can help to protect the business from financial distress and can help to ensure the long-term success of the company.
So, if you think you would like to take advantage of all that a high credit score can bring your company, here are a few ways in which you can build your credit score to help you in the future.
Establish a Credit History
One of the most important steps in building a strong credit score is establishing a credit history. This can be done by applying for credit cards, taking out a small loan, or even applying for credit with a supplier. The key is to make sure that the credit is used responsibly and that payments are made on time.
Keep Credit Utilization Low
Credit utilization, which is the percentage of available credit that is being used, is another important factor in determining credit scores. Lenders and credit card companies like to see a low credit utilization rate, which suggests that the borrower is using credit responsibly. To keep credit utilization low, small businesses should aim to use no more than 30% of their available credit.
Pay Bills on Time
Payment history is one of the most important factors in determining credit scores. Late payments, missed payments, and defaults can have a major impact on credit scores. To maintain a strong credit score, small businesses should make sure to pay all bills on time, every time. You can even automate your payments so you don’t forget to do them yourself. This can help you stay on track.
Monitor Credit Reports
It is important to regularly check credit reports to ensure that they are accurate and to catch any errors that could be negatively impacting credit scores. Small business owners can request a free credit report from each of the three major credit reporting agencies once per year. This way, you can keep on top of you’re rating, and whether your score has changed drastically over the last few months.
Keep Credit Accounts Open
Once a small business has established a good credit history, it is important to maintain it. One way to do this is by keeping credit accounts open, even if they are not being used. This helps to demonstrate a long credit history and can help to improve credit scores. If there is no credit score to be monitored and reviewed, you won’t have a credit score! Keeping your accounts healthy and open means a credit score you can boost and use when needed.
Be Mindful of New Credit Applications
Every time a small business applies for new credit, it triggers a “hard inquiry” on their report. Hard inquiries can have a negative impact on credit scores, so it is important to be mindful of the number of new credit applications.
Keep an Eye on Personal Credit Scores
As a small business owner, it is important to keep an eye on personal credit scores as well. Personal credit scores can impact the ability to secure business financing, so it is important to maintain a good personal credit score too. Keeping these points in mind will help you improve your credit score so your company can operate to the standards that you’re hoping for.