A business’s credit rating is an indicator of the likelihood that it will pay its bills on time, but that’s not all it is. The truth of the matter is that if your business has poor credit it could be costing you money, even if you don’t have a business loan or an outstanding balance on your line of business credit. So, how can your business’s credit rating cost (or save) you money?
Your Credit Is Your Reputation
While it’s true that a business’s reputation is not solely based on its credit rating, credibility is certainly a factor. Potential suppliers may be unwilling to do business with a company with poor credit, which can limit a business’s access to the best prices on inventory, raw materials, and supplies. Prospective clients may also check into a business’s credit file, especially if they intend to engage in commerce on a level that would make them vulnerable to problems resulting from a supplier’s financial instability. So, poor credit can diminish a business’s appeal to its most potentially lucrative clients.
A Hole in the Bucket
It’s no secret that businesses with poor credit pay more in interest rates, fees, and other charges, but some small-business owners may be unaware of the extent to which their lackluster credit ratings may be shrinking their bottom lines. On credit cards, their interest rates may be double what their creditworthy counterparts are paying. It also dramatically increases their interest rates on loans and lines of credit. All of that extra interest adds up to a substantial drain on a business’s cash flow and its ability to remain financially viable.
Gas, water, and electricity companies, mobile phone service providers, and equipment rental companies are likely to charge businesses with poor credit larger deposits than they would require of creditworthy businesses. And, while many of those deposits can eventually be reclaimed pending good payment history, having to pay them reduces the amount of available capital that a small-business owner has to work with.
A Lack of Flexibility
Businesses with solid credit ratings are able to use their financial flexibility to better manage their cash flow, and with better cash flow management comes savings in the form of early payment discounts and better credit, which will enable these businesses to save even more money in the future.
Get Serious About Business Credit
The best time to start building business credit is when the business is in its formative stages, but business owners who missed getting a head start in the business credit race should be aware that it’s not too late to start. By establishing business credit files, monitoring business credit ratings, and prudently managing their business credit accounts, small-business owners can build the sort of creditworthiness that will offer substantial long-term savings.