Intro:
Stellar business credit profiles help entrepreneurs fund their business ventures. Therefore, it’s important to keep the score on the higher end. When you start your profile from scratch, creditors and lenders will use your personal credit score to determine your creditworthiness. However, the two are not the same.
Even though a business and personal credit profile measure two different scores, the strategies that help improve each are similar. For example, it’s important to watch the debt-to-credit ratio. Even though creditors make $10,000 available to you, it’s best to maintain an outstanding balance of 30%, or $3,000.
We take a look at five ways to improve your business credit profile.
1. Pay the Terms, and Some Extra
Paying the terms and some extra remains the best way to improve a credit report. Credit reports reflect the creditworthiness of applicants. Every time a creditor issues credit or debt, they take a risk.
In business, it’s normal to invoice on 30-day terms. Some industries bill on 60-day terms. Corporations and enterprises receive 90 days to pay their suppliers.
Until you reach large corporation or enterprise status, pay the terms outlined by your creditors. Then, add some on top of it. Lack of cash flow is the top reason why businesses fail within the first two to five years.
If you have trouble repaying your creditors, it’s a red flag for your business and business credit report.
2. Keep the Profile Updated
Businesses don’t move around a lot or quickly. Business lease terms last at least one year. Others can run five years on average. Plus, business names can sound similar. Therefore, you want to ensure that your credit report reflects the correct information.
You might run A-1 Plumbing in a specific city and state. Thus, you don’t want business lenders, creditors, and suppliers to confuse it with the A-1 Plumbing in a different location.
Part of taking care of your business credit profile is protecting the company’s assets. In 2022, new insurance policies continue popping up to address areas of potential lawsuits such as cyber liability. For example, E&O insurance protects companies against financial loss in cases where a client sues for negligence caused by errors, mistakes, or oversight.
Protecting your cash flow with insurance makes you less likely to find yourself in a tight financial spot. Thus, insurance helps you maintain your company’s creditworthiness too.
3. Mind Your Debt Ratio
Common reasons why companies borrow include:
- Funding an expansion
- Purchasing new equipment
- Improving cash flow
- Increasing inventory
Therefore, spending all the funds acquired is logical. However, to maintain your creditworthiness, mind your debt ratio.
Ideally, the company will keep it at 30% or below.
Retail-oriented companies ramp up for the Holiday shopping season. Thus, they invest their cash flow into increasing inventories and marketing efforts. The goal is to enter the red and make it up during the busiest shopping season of the year. Sometimes, it works and keeps the companies in the black until the following year.
Entering the business world means taking calculated risks. To improve your creditworthiness, keep the debt ratio at a nominal level.
4. Review Your Report
Like a personal credit report, review your business profile regularly. Once every three months suffices. If your company actively uses credit and debt, review it every other month.
In addition to keeping the information updated, you want to make sure that entries remain accurate. Ensure that the credit and debit entries belong to your organization. Moreover, you want to avoid finding out that the report has mistakes when you attempt to apply for a loan, credit card, or terms with suppliers.
5. Ensure that All Trade Profiles Show Up in Your Report
Anytime a supplier grants you terms and credit, double-check that it shows up on your company’s profile. This improves it and increases your available credit.
If you pay your terms on time with something extra, the consistency keeps improving your report. The day that your company needs to ramp up inventory, purchase new machines, or expand, the credit that you’ll need has a higher chance of becoming available to you.
Once you accumulate credit, keep the accounts active. Using 30% from each means that you remain at a favorable debt ratio. Moreover, you’ll show that your company is healthy financially, especially for small businesses and solopreneur operations.
Conclusion
Most companies must borrow or obtain payment terms from suppliers. To receive the most favorable terms, keep your business credit updated and accurate.
