How to Maintain a Good Company Credit Score?
Maintaining a good credit score is an essential yet often overlooked aspect of managing a business. A business’s credit report is an excellent indicator of the establishment’s financial health and is what prospective lenders refer to when assessing an organisation’s creditworthiness.
Just like individuals, businesses need to build and maintain a good credit score to secure loans and manage long-term financial health.
Small and medium-sized businesses rely on finance from banks and non-banking financial companies (NBFCs) to help them grow. Whether you need funds to purchase new equipment, update existing infrastructure, or expand your business, a healthy credit score is instrumental in securing a loan to help you achieve your objective.
Know how to maintain a stellar credit score for your business! In this article, we’ll share some expert tips to help you navigate the ups and downs of credit management, including the common obstacles you might encounter on your journey to financial success.
A business credit report reflects the company’s borrowing and repayment history and is used by lenders to evaluate the company's financial trustworthiness.
Tips to Maintain a Good Business Credit Score
Advantages of having a Good Credit Score for Business Read More
• Pay All Business Bills on Time
Paying all dues on time is an excellent way to maintain and improve a business’s credit score and ensures that future loans or lines of credit will be quickly approved. These include loan EMIs, credit card bills, and all other arrears. Aside from positively affecting the business credit score, consistently timely payments also help build strong relationships with vendors and other creditors. On-time payments reflect your ability to manage liabilities efficiently and are one of the most direct ways to maintain a good credit score.
• Maintain a low credit utilisation ratio
Maintaining a low credit utilisation ratio is crucial for keeping your credit score healthy. Your credit utilisation ratio is the amount of credit you currently use compared to your available credit. A low credit utilisation ratio shows lenders that you are responsible with credit and can manage it effectively. On the other hand, a high credit utilisation ratio can indicate that you are relying too heavily on credit, which can negatively impact your credit score.
• Manage Debt
Businesses need to have cleared pending debt before applying for newer business loans. Managing business debt in this manner is a significant part of maintaining a healthy credit score. Failing to do so will negatively impact the score, resulting in difficulty securing lines of credit in the future.
• Avoid Cancelling Old Credit Accounts
A business credit score is determined by its credit history. A long credit history that spans several years indicates financial stability and highlights an organisation’s competence in repaying debts on time. Older credit accounts have a much more significant impact on credit scores. Closing long-standing accounts results in losing a business’s credit history; hence, this history is not considered when calculating the business’s credit score.
• Periodically Monitor Your Credit Reports and Score
It’s advisable to check business credit report updates at least once a quarter to ensure your company’s financial data is accurate. Business owners must regularly monitor their organisation’s credit reports and watch out for red flags, errors, and inconsistencies. Mistakes can happen, and inaccuracies in a business’s credit report can severely damage its credit score. Even if a company has consistently made timely payments to its creditors, a simple clerical error or missing paperwork can result in the loan remaining on the lender’s books for years, negatively impacting the business’s credit reports. This is why it is essential to regularly analyse and review a business credit report and promptly dispute any inaccuracies with the credit bureau in order to have errors corrected as soon as possible. Make it a habit to check your credit score regularly to ensure there are no discrepancies or unauthorised activities reported.
Overcoming Challenges to Maintaining a Good Business Credit Score
While the above tips can help maintain a healthy business credit score, business owners may face certain challenges when implementing these methods. Below are some of the challenges that might crop up and the strategies for overcoming them:
• An Inability To Maintain a Low Credit Utilisation Ratio
While businesses may aspire to keep their credit utilisation ratio low not to affect their credit scores, this can be challenging. The following strategies can help business owners with difficulty maintaining a low credit utilisation ratio.
• Reduce Spending
Decreasing your spending is the easiest way to maintain a low credit utilisation ratio. Businesses that regularly need to make large purchases should consider spacing these out or using a debit card instead of a credit card.
• Increase the Credit Limit
Requesting a higher credit limit is another smart way to reduce your business’s credit utilisation ratio. Of course, the final decision to increase your credit limit lies with the bank or lending institution. This may also lead to a credit inquiry, which may temporarily reduce your business credit score, but this will increase once the higher credit limit is approved.
• Spread Expenses Across Multiple Credit Cards
Using multiple credit cards can help business owners manage their credit utilisation ratio effectively. Spreading expenses across various credit cards can ensure a low credit utilisation ratio across all the cards, which is beneficial for a good credit score.
• Don’t Use All the Credit Cards at Your Disposal
Maintaining a few credit card accounts with zero outstanding balances is another easy strategy to obtain a low credit utilisation ratio. If possible, avoid using one or two of your credit cards over the next few months. Your overall available credit limit will automatically increase, lowering your business’s credit utilisation ratio. However, overspending on other credit cards defeats the purpose. Assess your overall credit limit, estimate 25% to 30% of it, and then plan your purchases appropriately. This approach will help maintain a healthy credit utilisation ratio, which is one of the key factors affecting a good credit score.
• Closely Monitor Your Business’s Credit Reports
As mentioned above, errors or oversights in a business’s credit reports can drastically affect the business credit score. Watch out for inaccuracies impacting your business’s credit utilisation ratio, and immediately report them to the credit bureau to rectify them. Any errors or outdated information in your business credit report could cause your loan application to be rejected or delayed. When you check your credit score frequently, you get early warnings about potential issues that may impact your creditworthiness.
• Consider Diverse Financing Options
Rather than relying solely on credit cards, consider other financing options like business loans or lines of credit when making large purchases or investing in the business.
• Difficulty Paying Dues on Time
Consistently paying business bills on time is critical to maintaining a healthy Business Credit Score. Refer to the following tips to ensure timely payment of dues.
• Create a Budget
Creating a well-thought-out budget for your business is the first step in organising your finances. It helps you keep track of all business expenses and ensures you have the finances available to cover all monthly bills and dues. By regularly reviewing the credit report for business, you can plan repayments more strategically and avoid missing due dates.
• Set Reminders
Adopting a simple calendar or reminder system can go a long way towards ensuring timely payments every month. Set up automatic bill payment systems with your bank or credit card provider to eliminate the chances of a missed payment.
• Prioritise Bills
Sort and prioritise bills by importance and their due date. Paying business-critical bills must be given priority over all other business expenses.
• Communicate With Vendors
Occasionally, extenuating circumstances prevent a business from paying vendors on time. In such cases, it is prudent to negotiate a payment plan or extension with the vendor to avoid such a lapse from affecting your business credit score.
• Regularly Monitor Credit Reports
Once again, actively monitoring your business’s credit reports can help spot errors and have them rectified before they result in lowering your business credit score.
The Bottom Line
While running a business includes several responsibilities like addressing employee issues, managing income, overseeing expenditure, and conducting marketing activities, business owners cannot afford to overlook their business credit score. It is crucial to perform regular business credit score checks to scrutinise credit scores and rectify errors, if any.
Staying proactive about maintaining a good credit score can significantly improve your business’s ability to access funding during critical growth phases. Whether you are applying for a new loan or negotiating better interest rates, a good credit score can put your business in a stronger position. Reviewing your business credit report periodically helps spot issues early and gives you time to resolve them before they affect your funding.
Elevate your business to the next level with CRIF’s annual credit report package! By subscribing, businesses gain access to regular credit report downloads that will help them stay on top of their creditworthiness and make informed decisions that benefit their bottom line. Don't wait for funding roadblocks. Check your credit score monthly and take corrective steps in advance.
Staying consistent with payments and monitoring reports diligently can go a long way in building a good business credit score over time.
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