Here’s Why Paying Attention To Your Business Credit Score Is Important (Tips Included)
Sometimes, 9-to-5 office workers tend to be disgruntled at business owners and CEOs for being wealthy.
There is often a general sense of envy, and sentiments like “life isn’t fair” are common. Many believe that in today’s world, even with hard work, not everyone finds the same level of success.
For some reason, entrepreneurs who take risks and win are seen as people who cheat the system. In reality, business owners face many challenges that lower and mid-level employees are simply not privy to.
Managing uncertainty, brand reputation, negotiations, regulatory compliance, and finance management are examples of major challenges that entrepreneurs face.
Surveys on small business owners showed that 52% of them were stressed out. It is not as rosy a life as people think. In this article, let us explore an aspect that contributes to a lot of stress. We will seek to understand what business credit scores are, why they are important, and how to raise them.
What is a Business Credit Score?
Borrowing money and debt can be a big taboo for the middle class. However, in the world of business, it is unavoidable. Even large companies borrow money from time to time for several reasons.
In business, borrowing money is done strategically to fuel growth and expansion. This is very different from borrowing money to sustain yourself or to buy something you desire. When it comes to business loans, the amount that can be borrowed can range anywhere between $1,000 to $6 million.
To borrow such money, businesses need to be able to prove their creditworthiness. In other words, they need to prove that they have the means to pay back the borrowed amount.
To establish how creditworthy a business is, credit scores are often used. These scores are given by agencies known as business credit bureaus.
According to eCredable, business credit scores are calculated based on factors like payment history and vendor relationships. Factors like company size, public records, and credit utilization are also relevant.
Scores are typically given out of ‘100,’ with each interval or segment denoting a certain level of risk. For instance, a score of 0-19 might indicate high risk. A business with such a score likely has a bad track record of paying back debts.
Scores of 60-79 might indicate a relatively positive credit history with minor, occasional issues. Scores of 80-100 could indicate low risk. Such companies are very likely to pay back what they owe.
Why Is Having a Good Business Score Important?
Businesses that can maintain a good credit score are more likely to attract investors and raise capital. This is a significant factor to consider in terms of growth potential. Even if you manage to find funding with a poor score, the terms are going to be less than ideal.
Lower scores also affect other aspects of business life. For example, insurance premiums often take business credit scores into account. If you don’t meet a certain level, you are likely looking at higher premiums. Similarly, landlords tend to offer favorable leasing terms to businesses with good credit scores.
To sum it up, these scores are often seen as an indicator of your company’s reliability and competence. A poor score can be a big hit for reputation and credibility within the industry.
What Steps Can You Take to Improve Business Scores?
The impact of a business credit score is significant enough that CEOs and business owners focus on them a lot. Naturally, paying back your dues on time is the obvious solution. However, other steps can be taken to maintain good scores. Let’s look at some of them.
1. Monitor your credit reports regularly.
2. Establish a positive payment history.
3. Maintain accurate financial records.
4. Separate business and personal finances.
5. Diversify your credit into different types, like trade, business, and term loans.
6. Communicate and have good relationships with your creditors and suppliers.
7. Address negative items and never leave outstanding debts pending.
8. Demonstrate strategic growth and expansion.
9. Establish your business as a separate legal entity. (For example, as an LLC or a corporation.)
10. Build a rainy-day fund instead of over-relying on credit.
Hopefully, these tips come in handy in managing your finances for good credit score evaluations.
At the end of the day, business credit scores are no doubt important. However, you shouldn’t spend too much time focusing exclusively on them. If there’s one thing about business, it is that almost every aspect can seem important. Learning which aspects to focus on and which to delegate will be a wiser choice in the long run.