Research from the NSBA Small Business Access to Capital Study found that 20% of small business loans are denied due to business credit. When you need a loan to expand to a new location, buy equipment, or reach the next growth phase, your business credit will play a significant role. Likewise, your business credit can impact your insurance rates and your ability to work with potential suppliers and vendors.
Protecting your business credit, therefore, is not something to ignore. Here’s how to maintain business credit and keep it from stifling your business growth.
Understand what factors can impact your business credit
While you may be familiar with the elements that can impact your personal credit, business credit scores are slightly different. These scores are determined using the following factors:
- Business longevity: The longer you are in business, the better for your credit.
- Revenue: If you are bringing in revenue, it may have a positive impact on your business credit.
- Assets: Real estate and other high-value assets could raise your business credit score.
- Outstanding debts: Paying off loans and credit cards on time and responsibly will help build your business credit.
- Industry risk: Some businesses, like bars and restaurants, are seen as riskier than others and can cause lenders to assess their credit differently.
- Personal and business loan and credit history: In particular, your personal credit score can impact your business credit, especially if you are a new business. “If you have some history that indicates your likeliness to pay back loans in the future, this can affect your score, as well as making you more attractive to lenders,” wrote Fundbox.
[Read more: 6 Documents to Prepare for a Small Business Loan Application]
Regularly monitor your credit score
The Small Business Administration recommends monitoring both your personal and business credit scores. “Existing businesses have the advantage of an established financial history. But loan eligibility for a new business is typically based on its owner’s personal credit score,” wrote the SBA.
Sign up for a business credit monitoring service to get alerts about changes to your report. This service can help you catch any problems before they grow too big. You can use the Annual Credit Report website to get free personal credit scores guaranteed by law. For your business credit, get a copy of your company's report from Experian, Equifax, Dun & Bradstreet, or another credit reporting service.
Acquire credit when you can get it, even if you do not need it.
Christopher Drake, founder and CEO of Drake Consulting Group, LLC
Protect your business from fraud
Identity theft and other types of fraud are serious risks for all small businesses, which are disproportionately targeted by hackers. Take concrete steps to reduce the risk of identity fraud and protect your business. Some best practices include:
- Shredding all sensitive documents, including anything with your business name, address, or credit card information on it.
- Using strong passwords and security measures.
- Educating your employees about fraud and providing training to spot and prevent fraudulent activity.
- Monitoring your bank account and credit card statements for any unauthorized charges.
The IRS also has a guide for protecting your business credit from fraud—as well as what to do if you suspect you are the target of an attack.
Use your credit responsibly
Build credit over time by establishing a line of credit before you need it, making payments on time, and making sure you are never over-leveraged.
“Acquire credit when you can get it, even if you do not need it. Continue to do this every year, and build more and more credit with any and all institutions willing to help,” said Christopher Drake, Founder and CEO of Drake Consulting Group, in Forbes.
Keep a close eye on your cash flow to make sure you’re always able to make payments and allocate resources responsibly. Maintain strong working relationships with your vendors, too, to make sure there’s stability and predictability to your cash flow. This cadence will help you keep your lenders satisfied and your credit score high.
[Read more: The Pros and Cons of Extending Credit to a Customer]
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
