Maintaining a healthy business credit history is just as important as maintaining a healthy personal credit history, especially if you’re a small business owners. Business credit has become significantly more important to banks and lenders over the last few years. Many lenders are now utilizing FICO’s “LiquidCredit” scoring model to evaluate small business owner’s creditworthiness when applying for a small business loan. Furthermore, in the first half of 2013, more than 45 million business credit reports were pulled from Dun & Bradstreet and more than 35 million were pulled from Equifax Commercial by creditors looking to extend new credit to small business owners. This means that more and more lenders are focusing on the creditability of the business (in addition to the credibility of the owners). This is why it’s important build and maintain a healthy business credit history – a business credit history that can serve as an asset (and not a liability). Below I give you 3 tips on how to take good care of your business credit.
- Be Mindful of the Customers You Accept – If you plan on allowing your customers or clients to pay you over time, you’ll want to check their credit history. Accepting payments from customers (instead of being paid upfront in full), runs you the risk of not being paid on time, which could cause you to have cash flow issues. Those cash flow issues could cause you to make late payments towards your own business expenses (e.g. loans, business credit, etc) or worse — put you out of business. That’s why it’s important to always conduct credit checks before allowing your customers to make payments for your products or service. Accept customers and clients with good credit so you have a higher chance of being paid on time, (and can make timely payments towards your own business obligations).
- Be Mindful of the Business Credit Offers You Accept – If you want to build business credit, you’ll want to apply for business credit offerings. These offerings include vendor trade lines, unsecured business lines of credit (or business credit cards). Depending on your business needs (as well as your personal credit history and score), you may find it best to apply for either (or both). If you have well established and stellar personal credit, you’ll find unsecured business lines of credit to be simple to obtain. If you have not built credit, you’ll find that obtaining vendor trade lines will be easier for you. The primary difference between unsecured business lines of credit and vendor trade lines is the former can be used anywhere for any business purpose (just like cash), and the latter can only be used to purchase products or service from a specific company (e.g. Quill, Uline, Office Max, Best Buy, Apple, etc).
- Complete Monthly Financial Projections – Before you take on any new debt, it’s best to have a solid financial plan in place that outlines how you will pay back that debt. Completing monthly financial projections will help you understand what you need to spend on purchases (using your business credit) in order to operate the business effectively and turn a profit. It will also help also help you make timely payments towards your business credit accounts, thus keeping your score at an admirable level in eyes of banks and lenders.
Following these tips along with developing good money management and credit building skills will enable you to keep a healthy business (and personal) credit history. As a small business owner, it’s important to know how significant credit can be to banks and lenders. At some point in your business life, you may need to raise capital from banks and lenders and that means that your credit must always be nurtured and treated as a valuable asset. If you’re interested in learning more about building your business (and personal) credit, please feel free to contact one of the Small Business Finance Advisors at LenCred today.