When you think about the things you need to get ahead in business — a steady cash flow, good branding, a solid customer base — credit scores may not be on your radar. While business credit scores and personal credit scores are calculated differently, both can have a huge impact on your business's success in the short and long term.
Understanding why good credit matters for your
business really means understanding how your credit is used. There are 4
specific scenarios when your business (or personal) credit scores may come
under scrutiny:
Good credit signals to lenders, vendors, and
utility providers that you're responsible when it comes to paying your bills.
Specifically, it shows that you pay your bills on time and that your business
is capable of managing its financial obligations, including debt. A poor credit
score, on the other hand, suggests the opposite.
Your business can reap several benefits from a
good credit score. Lenders, vendors, or other entities use these scores to
assess your overall business health. These examples illustrate when a better
credit score works to your business's advantage:
The better your credit score, the more likely
you may be to get approved for loans, lines of credit, or credit cards. Having
access to financing when you need it can be critical to your success. You can't
afford delays when you need a short term working capital loan to cover payroll
or a term loan to purchase a key piece of equipment.
While lenders may also review your time in
business and revenues, a good credit score can go a long way in aiding loan approval.
And if you're applying for utility services or a lease in your business's name,
a better score could result in a lower deposit.
Credit scores influence not only loan
approvals but the terms you receive. A higher credit score may result in a
lower interest rate on the loan and a lower total cost of borrowing. Depending
on how much you borrow, the loan term, and the APR, a lower rate could
potentially save your business hundreds if not thousands of dollars. Money
saved could be pumped back into your business to expand your product line,
revamp your marketing strategy, or simply increase your cash buffer.
Good vendor relationships are important
because these are the people you rely on for the products, materials, or
services you need to run your business. Establishing trade lines with vendors
becomes much easier when you have a good credit score backing you up. Vendors
may be more inclined to offer you favorable repayment terms or a higher credit
line. Being able to pay on a Net-60 basis, for example, instead of Net-30 could
make it easier to manage cash flow.
While you may be bootstrapping your business
in the beginning, there might come a point when you need financing to take
things to the next level. Better credit can open up more opportunities when it
comes to borrowing. For example, you may be able to qualify for $1 million
loan, whereas a lower score might limit your borrowing power to $100,000. That
significant difference can directly affect your ability to grow and expand at
the pace you'd like to set.
If your business or personal credit isn't as
good as you'd like it to be, there are things you can do to improve. With
business credit, the following steps are most important:
These same tips can be applied to improve your
personal credit scores. Additionally, you can also help your personal credit
score by applying for new credit sparingly. Each new inquiry for credit can
trim a few points off your score. Keeping older credit accounts open and having
a mix of both loans and credit cards can also help raise your personal credit
score.
Remember that credit scores are fluid and may
change from month to month as new account information appears on your credit
report. Checking personal and business credit reports regularly can help you
keep track of your progress as you work toward better scores.
Guest article written by Rebecca Lake
Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.
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