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Managing Small Business Credit: Dos and Don’ts

You’re told every day the importance of building credit. The better your credit score, the easier a time you’ll have obtaining important loans, securing good financing terms, and enjoying larger lines of credit.

Small business credit is effectively no different.

Why Small Business Credit Matters

Budding companies often need the help of small business lenders, and those lenders know the financial risks inherent with startups. Just like a bank will want to know whether a person can pay off their mortgage, it’ll also want to know if it’ll receive its money back if it makes a small business loan.

Thus, just like there are personal credit scores, there are business credit scores. Experian and Equifax, which produce consumer scores, also do so for small businesses — as does Dun & Bradstreet (D&B). While they all have small differences, the broader thrusts are the same: The better your pattern of financial behavior, the better your business credit score.

The better your business credit score, the better the potential “rewards,” including:

  • A financial safety net: Having good credit makes it more likely that you’ll be able to secure a business line of credit or business loan that you can use in times of need.
  • Better terms on credit: The higher your credit score, the less interest lenders need to charge to offset the risks of lending to you.
  • Better terms with suppliers: Having better credit can often land you better terms with your suppliers, too — not just in price, but on the length of time you’ll have to repay them.

So we’ve established why establishing and managing business credit is important. But how do you do it?

Let’s talk about how to build and keep up your creditworthiness.

Building Your Credit Score

First, here’s how to start establishing and growing your business’s credit score:

Get on the Bureaus’ Radar

When you form your small business, you need a couple basic identification numbers.

The major credit bureaus can use both of these numbers to identify your financial activities.

Find Reporting Vendors

When you start to select vendors for your business needs, ask whether they report payments to the major credit bureaus. Try to build relationships with the best vendors that also report. If you do, prioritize paying these vendors — on time, at worst, but early if possible.

Get a Business Credit Card

When you pay off a personal credit card, you build your personal score. Paying off a business card has the same effect on your small business’ credit score.

A lot of small business owners make the mistake of using their personal cards to help run a business. Not only does this take away chances to build up your business’s credit score, but it also complicates your finances — heightening your risk of an IRS audit.

Maintaining Your Credit Score

And now, here are a few simple tips for keeping your credit score high:

Pay Your Bills on Time

This obviously goes without saying, but late and missed payments will negatively impact your business credit score.

Keep Your Credit Utilization Ratio Low

Just because you have high credit limits doesn’t mean you should use them. Quite the contrary: If you don’t need to use your credit, don’t. Keeping your credit cards mostly or completely paid off will improve your score; holding on to a high amount of debt will weigh on it.

Keep an Eye on Your Score

Even if you do everything right, your small business’ credit score could still get dinged up. After all, people make mistakes. Unfortunately, while reporting errors might not accurately represent your actions, they can still weigh on your score. So, regularly monitor your report to make sure you’re recognized for your good behavior … and not unfairly punished for someone else’s sloppy bookkeeping.

Talk to the Pros

A high business credit score can yield thousands of dollars in interest-rate savings, not to mention all the financing doors it can open. That’s why it pays to talk to pros like the accounting and business experts at McManamon & Co., a firm that specializes in small and midsize businesses. Our skilled business consultants can help you with a wide range of financial matters, including how to better manage your company’s money and improve your credit score.

It’s never too late to build your small business’ credit score. Get started today by reaching out to us at 440.892.8900 or contact us online.

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