The importance of good business credit is impossible to overestimate. “Good business credit eliminated my need to dip into personal funds to run my business, and enabled me to hire new employees and buy better equipment,” says Nav CEO Levi King, a serial entrepreneur who started his entrepreneurial endeavors with a sign manufacturing business in Idaho—initially with no credit. Speaking from experience, he believes a good business credit score is essential to operating a successful small business. “It invigorated cash flow and opened the door to increased financing on improved terms. It brought order to chaos, as a surge in liquidity meant that I could react quickly to new opportunities without upsetting operations.”
Building a good credit score can a long, painstaking process (if you haven’t started it yet, check this out). Once you get there, you want to stay there, and avoid any mistakes that might compromise or even negate your hard work.
Let’s take a look at three of the top things to watch out for when seeking to build and maintain your business credit score.
1. Debt Usage
Debt usage counts for 15% of your Experian Intelliscore. If you’re utilizing most of your credit, this could be a sign that your business isn’t financially sound. Some lenders and suppliers require evidence of healthy cash flow before they’ll work with you, and consistently maxing out your credit cards can be a sign that you’re doing poorly in this department.
Keep the balance on your business credit cards low as often as you can. Unforeseen cash emergencies are to be expected when running a business, but don’t make a habit of running up a high amount of debt and carrying a balance from month-to-month on your credit cards.
Here’s a good business credit card hack: Try to pay down your card balance before your credit card provider reports your payments to credit reporting agencies (this is usually before the due date). By doing this, the debt usage on your business credit report will appear low—a sign that you’re managing your finances responsibly, and can help keep your business credit scores strong.
Derogatory information on your credit reports—like outstanding tax liens or collections accounts, bankruptcies, charged off loans, and late loan payments—count for another 15% of your Experian Intelliscore.
Derogatories can generally stay on your record for up to seven years—10 years, for bankruptcy—and if you pile up enough of them, your access to credit and loans can be severely restricted. Any financing you do receive will likely be given on draconian terms, making it difficult to keep your head above water even when business is good.
Prioritize paying off debts before taking steps to expand your business. Tighten your belt and make do with what you have until you’re in the clear with your debtors, and then move forward. Seven years of derogatory information on your credit report is seven years of bad luck; avoid it at all costs.
3. Payment Status
Payment status is the most important factor in your business credit report. It counts for 50% of your Experian Intelliscore, and 100% of your D&B Paydex score. Always make your payments on time. If you can, make them early.
It’s not always easy to stay ahead of things, so use money management tools to help you create budgets, manage cash flow, automate your bill payments, and alert you to unusual activity on your credit report.
The first step toward building and maintaining sound credit is to know what your credit report and credit scores actually say, so take advantage of Nav’s free business and personal credit reports to familiarize yourself with where you stand.
It’s important to be proactive when it comes to your credit, according to Levi King. “You can't afford to wait any longer to fatten up that credit file,” he says. “You may not see the need for more financing today, but tomorrow will be here soon enough, and with it a host of setbacks and opportunities you never could have predicted.”
About Nav: Nav is the free, easy way for business owners to access their business and personal credit scores and get matched to the best financing.
Please note that KPMG Spark’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of KPMG Spark.