Accessing credit becomes even more critical during uncertain economic times. With the potential for a drop in revenue, companies must adjust their cash flow and find ways to cover any shortfalls or reduce their expenses. Those with strong credit scores and easier access to credit have the best chance to ride out any short-term pain.
Being able to borrow funds, and do so on favourable terms, gives you much more flexibility when it comes to adjusting to new market conditions. But how can you successfully manage debt in the short term while maintaining your credit score for the long term?
Before getting into tips for protecting your credit score, it is essential to understand the factors affecting it.
The factors affecting your business credit score
Business credit scores are calculated based on a range of factors, including:
- Time in business: Being in business for longer positively affects your credit score.
- Financial history: This includes the revenue you bring in, your track record for meeting payments on time, and whether your business has any other long-term debt.
- Assets: The property or other valuable items on your balance sheet that could be used as collateral when borrowing.
- Industry: Operating in higher-risk industries often leads to a lower credit score.
- Personal credit history: The business owner’s credit score can impact the company’s score, especially in the early stages when you are just starting operations.
Below are four tips to help protect your business credit score in the face of a difficult economic forecast.
1. Utilizing fast payment types
Many businesses fall into using a few payment methods by default, even if they have an inherent delay. This includes ACH (Automated Clearing House), a popular type of EFT (Electronic Funds Transfer) for B2B payments with a standard delay of up to three days. But companies can also pay with fast ACH as many banks offer same-day or next-day ACH.
Businesses asking for payment via ACH can complicate your cash flow, as using standard ACH means any bills must be sent at least three days before, increasing your chances of missing a payment. Not only could this potentially affect your credit score, but it could also lead to additional fees and affect your relationship with business partners or lenders moving forward.
When organizing your accounts payable, utilize fast payment methods wherever possible. This improves your cash flow flexibility (allowing you to hold on to funds for longer) and management (making it harder to miss a bill).
2. Using credit responsibly
While we live in a credit-based economy in many respects, and you should always try to establish a line of credit before you need it, it is also vital to use credit responsibly.
- Track your cash flow carefully and ensure you have the funds available to meet repayments.
- Develop good relationships with your vendors and lenders, meeting payments on time to help build your credit score and prove you’re a responsible business owner running a credit-worthy operation.
- Don’t let your credit utilization ratio (the credit you are using divided by the total credit available to you) get too high, as it can negatively impact your credit score, giving the impression you are maxing out every source of funding.
You need to use credit sensibly in order to increase your score. This doesn’t mean maxing out your cards and buying everything you can on credit just to pay it back. It means operating responsibly and demonstrating the viability of your company to current and future lenders.
3. Choosing the right vendors
Improving your credit rating requires paying your invoices and bills on time. While repaying banks for any loans or lines of credit will automatically help your credit score, not all vendors report credit history to rating agencies. Additionally, some may only report your history if you cross a minimum dollar value in purchases. Therefore, you may not always get acknowledged for being a good business partner and paying off your credit.
If you are confident in your cash flow situation and want to improve your credit rating, it is a good idea to ask vendors whether they report to credit bureaus when selecting new suppliers.
4. Dealing with a missed bill
Whether due to an administrative mistake or a lack of funds, every business will occasionally miss a payment. To limit the repercussions, contact the creditor as quickly as possible and explain your situation. See if you have automatically triggered a late fee or if you can send an immediate payment to prevent any further consequences.
If you cannot make an immediate payment, you need to understand the consequences in terms of fees or interest. Unplanned debt can quickly spiral into a major liability, and paying it off should become a priority for you moving forward.
In terms of credit score, you can help minimize a missed payment’s impact by making small, regular repayments. This shows creditors that your business is active and that you are working to honor your commitments. On the other hand, waiting months to repay your creditor all in one go maximizes the negative impact on your score and can lead to other issues, such as credit blocks or vendors demanding cash on delivery.
Protecting your credit score to protect your future
Protecting your business’s credit score is vital to future success, allowing you to access new funding and take advantage of potential growth opportunities. Not only does your credit score determine whether banks will lend to you, but it also determines the terms of that financing. A good credit score leads to lower interest rates, saving you money. Additionally, business credit affects insurance rates and vendors’ willingness to work with you.
Given the tricky economic forecast, businesses short on money may need to utilize credit to manage their cash flow effectively and ride out any short-term drops in income. However, companies relying more on credit need to do so sensibly not to overextend their finances and miss payments. Your credit rating is one of the most important financial metrics associated with your business and you should always strive to protect it, even during a crisis.