Many small business owners work extremely hard every day to maintain the prosperity of their business. From communicating with customers and vendors to finding better ways to sell their products and services, small business owners do their best to increase their business.
However, they may, at times, neglect their credit ratings. The credit ratings of your business are certainly one of the most important factors when it comes to accessing finance or obtaining short-term credit to start, support, or develop your business.
Even if you’re running a business from your garage, there’s a chance that at some point, you’ll borrow money to start or run your business effectively. This mostly comes down to having a good credit rating for your business. It requires an increase in the credit rating of your business.
What Factors Impact Your Credit Score?
Your credit can affect your life in other ways as well. It can affect your interest rate, car insurance premiums, prevent you from buying or renting what you want. Therefore, keep your credit limit low.
It is essential to know what affects your credit score because you could unknowingly damage your credit, which can be prevented if you have the right information.
What Is a FICO Credit Score?
First, we need to break down which of the most commonly used metrics to calculate your credit score. FICO credit score is a number ranged from 300-850, and it helps creditors understand how strong your creditworthiness is.
In general, the higher the credit score, the more you will be allowed to borrow, and the lower your interest rates will be. A low credit score indicates that you are not as reliable as a borrower, and you will probably be allowed to borrow less and have higher interest rates.
There may also be some differences in how exactly your FICO credit score is calculated, as there are also industry-specific FICO scores. However, generally speaking, when you have healthy credit habits, there is no need to focus on differences in calculation.
How FICO Scores Are Calculated
- Thirty-five percent – payment history. The most significant factor that affects your credit score is whether you make payments on time or not.
- Thirty percent is the use of credit. This number is the amount of credit available that you use compared to what you have. The less you use the credit, the higher your rating.
- Fifteen percent is the length of your credit history. This number comes from how long you have had credit accounts. However, there are some discrepancies about where this number came from.
- Ten percent is a credit mix, meaning the different types of credit accounts you have opened.
- Ten percent is a new loan. This number comes from how many new accounts you have tried to open in the last 12 months.
Five Tips to Improve Your Credit Score
Unfortunately, for many small business owners, building a business is not like a racing car, where you can increase engine speed and get instant results.
It is more like your driving record, where everything, including your past driving behavior and actions, is taken into account. It is recommended to follow these Five easy ways to improve the credit rating of your business.
TIP 1: Pay Bills on Time
Photo by Carlos Muza
Reduced timely payment of bills will damage your credit and your business credit rating. Delayed payment of bills can damage your record, especially if your lender decides to report you.
Timely payment of bills is a good business practice that will improve your performance as well as help you maintain a good relationship with your lenders.
TIP 2: Reduce Credit Usage and Keep Debt Levels Low
A large amount of money coming into banks and other creditors will be one of the most critical factors affecting the credit rating of your business.
Although you may need a loan or two to grow your business and cover costs, it is often recommended to keep any revolving debt to a minimum. Keeping your debt low will reduce your use of credit, which works well for maintaining a high credit score.
TIP 3: Check Your Business Credit Report Regularly
Indeed, many business owners do not know the credit ratings of their companies. It is imperative to periodically and regularly monitor the credit report of your business to avoid errors and inaccuracies that could lead to a drop in your credit score.
TIP 4: Use Credit
As many financial experts will note, the use of credit is the right game to play. You should open several business credit accounts, such as credit cards and loans, and make sure that you play by the rules and pay them back on time.
TIP 5: Avoid Closing Accounts
Closing credit accounts and removing them from your credit report just because they have been paid is an option that every small business owner should avoid.
You may have spent the last few years working tirelessly to settle your card balances and may want to close your accounts to limit future expenses. However, closing these accounts can harm the credit rating of your business. It may, in turn, limit the amount of credit you have at your disposal.
To Sum It All Up
Using the simple tips above will help you build and improve the credit rating of your business. Not only will you be able to get bigger business loans, but you will also be able to get better interest rates.
As a business owner, you should practice these habits regularly to improve your credit score continuously.