Every small-business owner knows that their business credit score affects their ability to take out a business loan, but that’s not the only reason building solid credit should be a priority. Good business credit enhances a business’s reputation, improves its capacity to manage cash flow, and serves as a lifeline in trying times. It can also lead to better business opportunities, and even increase the value of the business itself.
As important as business credit is, small-business owners owe it to themselves to develop an understanding of the factors that affect their business’s credit ratings. What are they?
Payment Track Record
When it comes to paying bills, business owners should adopt a policy of paying ahead of schedule whenever possible. The earlier bills are paid, the higher the business’s PAYDEX® score will rise. The PAYDEX® score is an important metric in the eyes of lenders and potential business partners. Businesses that consistently pay their bills on the due date will typically have a PAYDEX® score of 80, but scores of up to 100 are possible, so it’s best to aim high.
Even creditworthy businesses may be turned away for financing if their financial affairs are not in order. Factors such as a business’s debt ratio, its debt service coverage ratio, and its loan-to-value ratio can all impact its credit rating. In addition to maintaining healthy operating capital, business owners should make sure to keep the business credit bureaus updated on their current financial affairs, as outdated financials can reflect negatively on a business’s creditworthiness.
When a business applies for multiple sources of credit in short succession, credit bureaus and potential lenders may see it as a sign that the business is in desperate need of capital. Small-business owners with aspirations of establishing solid business credit ratings should try to keep credit applications to a minimum whenever possible.
Business Credit Monitoring
While business credit monitoring itself does not directly impact a business’s credit ratings, business owners who regularly monitor their business credit tend to have healthier credit than those who do not. Credit monitoring services such as CreditMonitorTM from Dun & Bradstreet help business owners better understand the factors that impact their credibility.
With this awareness comes a greater capacity to favorably impact credit scores. In addition, credit monitoring alerts business owners to negative changes to their business credit files, which allows them to mitigate the damage that these changes might cause if they went unnoticed.