6 Factors That Impact Your Business Credit
- February 24, 2023
Your business credit score is critical to your financial health as a business owner. It is crucial in determining your ability to secure financing, attract new clients, and grow your business. Many factors can impact your business credit, some of which you may need to be aware of. In this post, we’ll explore the most significant factors that can impact your business credit score.
Your credit capacity is the total debt your business can safely assume. It depends mainly on the size and stability of your company, and lenders use it as an indicator of whether you can pay back any loans or lines of credit you may secure. The amount of credit you can access will impact your ability to make large purchases or investments, so it’s essential to monitor this factor and be aware of any changes.
You can improve your credit capacity by reducing the debt you owe, increasing your revenue, and demonstrating financial stability. Adding tradelines also helps, as they strengthen your credit profile and give lenders more insight into how you manage debt. Before adding tradelines to your credit report, check the tradeline supply company review to ensure you’re working with a reputable vendor. The added tradelines will help you increase your credit capacity and make you more attractive to lenders.
Your payment history is one of the most critical factors impacting your business credit score. Making regular payments on time will show lenders that you’re capable and responsible for managing your finances. This can have a positive effect on your overall credit score.
However, if you miss or make payments late, it could damage your credit. To ensure you have a positive payment history, ensure you’re always up-to-date with your payments and set reminders or automatic payments to help you stay organized. Additionally, avoid taking on more debt than you can afford to pay back promptly.
Your credit utilization ratio is the amount of credit you currently use compared to your total available credit. Lenders consider this ratio when determining how much risk they’ll take by lending money to your business. Higher utilization ratios can indicate that you’re overextended and may be a red flag for lenders.
To improve your credit utilization, you should keep your credit utilization ratio under 30%. You can do this by either increasing your available credit or reducing the debt you owe. The lower your credit utilization ratio, the better it will look to lenders. Remember that different types of credit (such as business credit cards and lines of credit) may have different utilization limits. Check your lender’s guidelines to ensure you stay within the recommended range for each type of credit.
Age of Credit
The age of your credit can also affect your business credit score. The longer you’ve had an account open and in good standing, the better your score will be. This is because lenders are looking for stability when considering whether to lend money to your business.
Your credit age is tied to the time your accounts have been opened. If you want to improve your credit score, keeping your oldest accounts open and in good standing is important. It may take a lot of work for newer businesses to build up a credit history and score right away. One way to do this is by getting a business credit card or a small business loan from a credit union, which can help establish your business’s financial credibility.
Number of Credit Inquiries
Credit inquiries are the number of times lenders have checked your credit report. Frequent inquiries can indicate risk to lenders and may negatively affect your score. To avoid this, it’s important to only apply for credit when needed and only apply for a few accounts in a short period.
If you get an inquiry on your business credit report, follow up with the lender and be sure they’re using the correct information. This way, you can ensure that any inquiries don’t hurt your credit score unnecessarily. While inquiries can affect your score, they typically only stay on your credit report for two years.
Type of Credit Used
Not all credit is created equal. Different types of credit, such as loans and lines of credit, can affect your business’s credit score differently. For example, installment loans are usually viewed more favorably than revolving accounts like credit cards.
When building your business’s credit history, you should diversify the type of credit you’re using. This means using a mix of loans and lines of credit to show lenders that you can responsibly manage different types of debt. In addition, it’s vital to ensure you’re using the correct type of credit for your business’s specific needs. For instance, a short-term loan might be better for covering immediate expenses like payroll or inventory. In contrast, a line of credit or term loan can be used for longer-term investments such as equipment purchases or expansion projects.
While many factors can influence your business credit score, these five are the most important ones to consider. Following these tips can improve your credit profile and give lenders more insight into how you manage debt. This will increase your chances of getting approved for financing and ultimately help you grow your business.