No business has an unlimited funding pot and that means credit will have to be obtained at some point. Whether you’re investing to expand or managing monthly cash flow, having a good business credit score is going to make things easier.
It means lower interest rates and insurance premiums, wider access to loan products and suppliers, and a larger safety net if things start to go wrong.
But how do you maintain good business credit and avoid messing it up? Our top 11 tips can help …
11 Ways to Avoid Messing Up Your Business Credit
1. Set-up As a Separate Legal Entity
To build up a proper business credit rating and gain access to the best services you need to legally separate yourself from the business. This means setting up as a company, where it can stand on its own.
Now you can build up the credit and reputation of your business without your personal credit or other business and financial interests getting in the way. You will also have a clear structure and set of accounts, which appeals to creditors and business partners.
2. Have a Business Checking Account
Following on from tip 1, setting up a checking account for your business further separates your personal and business finances.
It also looks more professional to business partners and makes it easier to manage overall. Now if an unexpected personal bill comes out it won’t have a knock-on effect.
3. Monitor your Credit Report
A wise business owner monitors their credit report monthly instead of waiting for the yearly report. Not only does this keep you informed about your credit rating and whether it’s going in the right direction, but you can also spot errors and get them corrected before any real damage is done.
It’s not unheard of for businesses to be unknowingly affected by reporting errors by creditors, such as settled accounts remaining open, missed payments when the payments were made, or personal details simply being incorrect.
4. Don’t Close Old and Unused Credit Accounts
If you no longer need a supplier line of credit or you have an old credit card that you don’t use, your natural instinct might be to close the accounts. This is a bad idea because eventually all of that positive history will disappear from your credit report and future creditors will have no idea that your business traded so well for many years.
5. Use All Your Accounts
By the same token, it’s better to use all of your credit accounts than to let them sit dormant, even if you only put your lunch and coffee on them. Every successful payment counts in the big picture, and who knows, there may be a time when you really need them.
6. Stop Maxing Out your Credit
Your credit utilization ratio is the measure of your outstanding balances compared to your total credit limit. While it is always a good idea to use all of your credit accounts, regularly maxing them out is looked down on by lenders, even if you pay the balances off in full every month. This is because it gives the impression that you’re only just able to meet your outgoings. An unexpected bill here, a drop in revenue there, and you could be forced to go over your limit.
As a rule of thumb, try not to use more than 30% of the credit you have access to at any given time.
7. Don’t Open too Many Accounts
Tied to credit utilization is also your overall access to credit. There is a point you can reach where you simply have too many accounts and lenders deem you a risk. This is because if you were to suddenly max out all of your accounts, you would have no realistic way of paying them off because the total amount is simply too much.
8. Use Second Chance Loans Strategically
If you have already found yourself with poor business credit, there are ways to rebuild your score. So-called online second chance loans, for example, are relatively easy to obtain and if you take out a small strategic amount, you can begin making successful repayments and building back that rating.
If you’re having temporary cash-flow problems, you can also use such a loan to avoid missing payments on your other accounts, which will prevent your credit score from taking a hit.
9. Stop Co-Signing For a Friend
Your business is doing well, you’ve got good credit, you might be tempted to extend this to your friends or yourself. However, becoming a co-signer on somebody else’s loan is not without risk and it will impact your business credit rating. And if you friend or colleague fails to make payments, the obligation will transfer to your business.
10. Don’t Mix Business and Pleasure
It’s also not a good idea to start mixing your business finances with your personal finances. Just because you have credit available through your company, doesn’t mean you should use it to pay for this year’s Christmas gifts. If for whatever reason you can’t make the repayments, you could destroy your business and the very entity that generates your income in the first place. At best you’re going to harm your business credit.
11. Does Your Trade Credit Provider Report?
If you have a line of credit with a supplier or you utilize a specialist trade credit provider, they will not necessarily be reporting your data to a credit bureau (though they will if you start missing payments).
What this means is your credit report is getting none of the positives because your agreements and successful payments aren’t being recorded.
So, if possible, always seek out credit accounts from those who do report to the bureaus.
By applying the above tips you should earn a good business credit rating and set yourself up for success. Got any advice of your own? Let us know in the comments below!
Author bio: Brian Loman is a longtime blogger, with a particular passion for finance and insurance. He also blogs about lifestyle and a range of other topics for a number of websites. He currently writes for ElcLoans, where he shares his knowledge on short-term loans. Follow him at TW.