A credit score is a metric of your reputation as a business. Having a good credit score is essential in making business deals and having a good credit score would have multiple benefits such as suppliers giving you more favorable payment terms and lenders giving you better access to credit and capital.
A lot of companies create credit scores and reports and each company has their own system for this process. Because of this, your business will have several credit scores but you won’t exactly know how they were calculated. Although they all vary, there are some basic criteria that are used in developing your credit score.
- Credit scoring companies have connections with debt collection agencies, and they know who pays and more importantly, who pays on time.
- Credit scoring companies also have access to publicly available information about your business from government departments as well as banks.
- Anyone can file a report against your company if you don’t pay on time.
- Accounting software may also generate credit reports for some companies.
Now that you know how credit scoring companies evaluate your score, here are the steps you need to take to make sure your business isn’t red-flagged to lenders or other businesses.
1. Review your business credit score every quarter of the year.
If there is a dip in your score make sure to contact the credit scoring company. They are legally obligated to tell you the reasons why your credit score has gone down. There could be a myriad of reasons as to why but you can get your credit score corrected for valid reasons.
2. Pay your bills on time or earlier than when it is due.
The bulk of your business credit score depends on making on-time payments.
Set up these things to ensure that your payments are on schedule:
A. Accounts payable system to tell you when bills are due.
B. Automated payments
C. Cash flow monitoring system to see if there are going to be any problems
when due dates arrive.
While paying on time gives you a good score, there is a higher chance of earning a better credit score when paying your vendors earlier than the due date. As a business, this should be the first option, and paying on time the second. By following this thought, your business will get used to paying your credit obligations earlier.
3. Be honest if you see that your cash flow has issues.
Suppliers, Vendors and Lenders are less likely to file a complaint against you to a credit scoring company if you are able to explain why you will be paying late, and when you are able to pay.
4. Limit your credit applications.
It may seem counter-intuitive that credit companies wouldn’t want you using their credit all the time as this is their business model. However, if you frequently apply for credit in a short span of time it makes credit providers think that you’re overly reliant on credit and as such your business is at high risk.
Instead, space out your credit applications and use your credit wisely.
5. Monitor your credit reports
Fraudulent reports and even errors in them can actually impact your business’ credit score and may result in making it a lot more difficult to get credit or borrow money. Make it a habit that you actually check the business credit reports for errors or fraud more than a few times each business year in order to find errors or fraud and be able to correct them immediately.
While it takes time to build your credit, the results in being able to establish one for your small business will be worth it. Start early, and reap what you sow earlier, in order to get a safety net, and even potential savings, in the future.
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