The Basics of Bad Business Credit (and Actionable Tips for Improving It)

September 5, 2019

Running a business comes with tons of opportunities and responsibilities. As a business owner, you must dedicate most of your time towards marketing your offerings and ensuring your customers are happy all the time. With all these responsibilities on your plate, you may ignore your business credit scores. However, your business credit is a fundamental part of your business’s success and growth. Lenders throughout the world view your business credit score as a representation of your company’s financial muscle and capability to manage debt prudently. If your business credit is good, you’ll get the funds you need to support and expand your business. A bad business credit, on the other hand, will reduce your chances of securing a business loan or even a line of credit at good terms.

What is Bad Business Credit?

Major credit bureaus like FICO, Business Credit USA, Dun & Bradstreet, and Equifax Business define bad credit for business as a score below 50. Lenders consider this low score a red flag because it shows you aren’t responsible in the management of your business finances. They view your business as a higher risk, meaning it has a high probability of missing out on payments or defaulting a loan altogether. Most loan applications fail to go through because of bad business credit. Even if you manage to obtain a personal business loan with website like this, it will attract high-interest rates or unfavorable terms. Moreover, you may be required to increase your car-used-for-business insurance payments or pay more on utilities.

Factors that Affect Your Business Credit Score

There are loads of factors that can negatively influence your business credit score, limiting your options for a business loan. Below are a few examples:

Number of Tradelines

A tradeline is the same as a credit line but in the context of personal credit scores. A tradeline is any transaction whereby one business gives credit to another. It can range from business loans, to credit accounts, to vendor accounts receivable. Having lots of tradelines open at the same time can negatively affect your business credit and prevent you from obtaining future tradelines.

Unpaid Balances

Unpaid balances usually arise when a business goes through a phase of struggling. If these unpaid balances are reported to one of the major credit bureaus, you’ll see a dramatic decrease in your business credit score.

Public Records

Negative public information like liens, or judgments will negatively impact your business credit and will make new loans almost impossible to obtain or only realizable at unreasonable rates.

Payment Profile

Managing a business requires having sharp eyes for details, particularly when handling cash flow and accounting issues. Things like substandard bookkeeping and inconsistent payments to suppliers and lenders will certainly weaken your business credit score, even if you’re operating a flourishing company.

Actionable Tips for Improving Business Credit

Having a bad business credit can make you feel disappointed. The good thing is that credit isn’t fixed in stone, so you have the ability to improve it today. Here are 5 practical tips to help you enhance your business credit score.

1. Stay in Business

Length or history matters a lot when it comes to credit scores, whether personal or business. The longer your business remains in operation, the healthier your business credit score gets. Time in business is also one of the essential factors that lenders look at before deciding whether you qualify for a loan. If your business is just getting off the ground, you’ll need to set up a business credit report with credit bureaus so that you can begin building your business credit score from scratch.

2. Practice Timely Payment of Bills

This might sound obvious, but paying your bills on time will boost your business credit score. Ensure you’re on time with any utilities, rent, or credit card payments. and you’ll see a major difference as far as your business credit is concerned.

3. Minimize Your Credit Utilization Ratio

Credit utilization ratio refers to the proportion of credit utilized (what you use) compared to the amount of credit accessible (what’s available). This is one of the factors that credit bureaus consider when calculating your business credit score. It’s usually advisable to maintain this ratio below 15%. Here are a few ways to lower your credit utilization ratio.

Clear your balances: If you pay off your balances in full, the ratio will go down significantly. Even if you can’t clear them completely, make a point of bringing them down as low as possible.
Raise your credit limit: Ask your credit card provider to raise your limit, and just like that, you’ll have brought the ratio down
Reduce credit card expenses: Minimize your spending on credit and you’ll see impressive results.

4. Establish a Secured Credit Card

Obtaining a secured credit card is one of the many ways that businesses with bad credit can get loans and improve their credit score. Here is how it works: You load your account with a certain amount of money, and the lender gives you a line of credit that is either equivalent or less than the value of that account.

If you make payments timely and consistently, your credit limit will move up automatically without you having to add more money to the account . The lender will forward your payment history alongside debt amount to the credit reporting firms on a monthly basis. This can be instrumental in transforming your business credit rating from bad to good and, eventually, to excellent.

5. Inspect Your Reports for Errors and Hard Inquiries

Everyone makes mistakes, and credit bureaus are no exception. It’s imperative to ensure that only correct and up-to-date information about your company is reported. You should go through your business credit score to ensure there are no errors or false inquiries. If you notice something that shouldn’t be on your report, contact the bureau to dispute it. Be sure to review all the credit ratings from the leading credit bureaus.

An excellent business credit plays a formidable role in the success and rapid growth of your business. The good thing is that improving your business credit doesn’t require that much effort at all. Many of the tasks you perform as a accountable business owner, including paying bills on time and conscientiously managing tradelines or business loans, will boost your score.