When you think about the things you need to get ahead in business — a steady cash flow, good branding, a solid customer base — credit scores may not be on your radar. While business credit scores and personal credit scores are calculated differently, both can have a huge impact on your business’s success in the short and long term.
Why You Need Good Credit in Business
Understanding why good credit matters for yourbusiness really means understanding how your credit is used. There are 4specific scenarios when your business (or personal) credit scores may comeunder scrutiny:
- when applying for business financing, including loans, lines of credit, and credit cards
- when applying for new trade lines with your vendors
- when establishing utility services (such as electric, cellular, and internet services) for your business
- when leasing property or equipment for your business
Good credit signals to lenders, vendors, andutility providers that you’re responsible when it comes to paying your bills.Specifically, it shows that you pay your bills on time and that your businessis capable of managing its financial obligations, including debt. A poor creditscore, on the other hand, suggests the opposite.
How Good Credit Can Help Your Business
Your business can reap several benefits from agood credit score. Lenders, vendors, or other entities use these scores toassess your overall business health. These examples illustrate when a bettercredit score works to your business’s advantage:
1. It can make credit approvals easier
The better your credit score, the more likelyyou may be to get approved for loans, lines of credit, or credit cards. Havingaccess to financing when you need it can be critical to your success. You can’tafford delays when you need a short term working capital loan to cover payrollor a term loan to purchase a key piece of equipment.
While lenders may also review your time inbusiness and revenues, a good credit score can go a long way in aiding loan approval.And if you’re applying for utility services or a lease in your business’s name,a better score could result in a lower deposit.
2. You may qualify for better interest rates on loans
Credit scores influence not only loanapprovals but the terms you receive. A higher credit score may result in alower interest rate on the loan and a lower total cost of borrowing. Dependingon how much you borrow, the loan term, and the APR, a lower rate couldpotentially save your business hundreds if not thousands of dollars. Moneysaved could be pumped back into your business to expand your product line,revamp your marketing strategy, or simply increase your cash buffer.
3. You may get better terms from suppliers
Good vendor relationships are importantbecause these are the people you rely on for the products, materials, orservices you need to run your business. Establishing trade lines with vendorsbecomes much easier when you have a good credit score backing you up. Vendorsmay be more inclined to offer you favorable repayment terms or a higher creditline. Being able to pay on a Net-60 basis, for example, instead of Net-30 couldmake it easier to manage cash flow.
4. You can grow your business on your terms
While you may be bootstrapping your businessin the beginning, there might come a point when you need financing to takethings to the next level. Better credit can open up more opportunities when itcomes to borrowing. For example, you may be able to qualify for $1 millionloan, whereas a lower score might limit your borrowing power to $100,000. Thatsignificant difference can directly affect your ability to grow and expand atthe pace you’d like to set.
How to Improve Your Credit
If your business or personal credit isn’t asgood as you’d like it to be, there are things you can do to improve. Withbusiness credit, the following steps are most important:
- paying bills on time, includingvendor trade lines, everyday operating expenses, business taxes, and debtobligations
- maintaining low balances onbusiness credit cards, lines of credit, and tradelines
- reviewing business credit reportsto check for errors and disputing any mistakes or inaccuracies to have themcorrected
These same tips can be applied to improve yourpersonal credit scores. Additionally, you can also help your personal creditscore by applying for new credit sparingly. Each new inquiry for credit cantrim a few points off your score. Keeping older credit accounts open and havinga mix of both loans and credit cards can also help raise your personal creditscore.
Remember that credit scores are fluid and maychange from month to month as new account information appears on your creditreport. Checking personal and business credit reports regularly can help youkeep track of your progress as you work toward better scores.
Guest article written by Rebecca Lake
Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.
Carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.
