Whether we like it or not, access to credit is an essential part of running a small business, but being considered creditworthy can be a challenge. According to Credit Karma, more than 75 percent of Americans have a credit score below 700.
If you are one of the many who have a credit scores below 700, there’s no time like today to take the steps needed that could have a major impact on your personal and business creditworthiness.
Here are ten important do’s and don’ts to get you on the path to creditworthiness.
Do pay all your bills and invoices on time.
Paying on time is one of the key building blocks of establishing creditworthiness. It builds good relationships between you and your suppliers resulting in better terms and stronger purchasing power. Payment history accounts for 35 percent of your FICO® scores and is a contributing factor in the makeup of your business credit ratings.
Don’t forget to read the terms and conditions.
Read and understand all aspects of business contracts and credit agreements prior to signing the dotted line. You could end up incurring extra fees or charges by not reading and understanding the terms and conditions.
Do build your business credit reports and scores.
Banks, lenders, suppliers, insurance companies and investors use company credit reports from business credit reporting agencies such as Dun & Bradstreet.
“Just as your personal credit has a big impact on your financial health, your business credit can help you get competitive business loan rates and terms from potential suppliers,” says Marc Kirshbaum, president of Experian’s Business Information Solutions group.
Don’t co-mingle your personal and business finances.
For starters, create a separate bank account and obtain a business credit card. Be sure to keep excellent records and document all business expenses. Documenting allows you to become a better bookkeeper for your business, making it easier during tax time.
Do obtain a business credit card.
A business credit card is an invaluable tool for building business credit, managing expenses and separating your personal and business expenses. With a business credit card used solely for company purchases and expenses you eliminate the risk of co-mingling funds.
Don’t just pay the minimum amount due.
It is essential to pay more than the minimum amount due whenever possible. Paying more helps reduce your overall balance owing, which improves your credit utilization and raises your score. This also helps prevent your debt from piling up since your chipping away at the overall balance.
Do look into alternative financing programs.
Alternative lenders offer many opportunities for small businesses to get funding without relying on traditional models of risk assessment. Programs such as revenue based financing and crowdfunding have gained in popularity over the years. In addition, the power of the internet has given rise to online alternative lenders which look at various aspects of business data as opposed to relying on credit scores alone.
Don’t max out your credit cards.
Credit utilization plays a major factor in the makeup of your personal FICO® scores accounting for nearly 30 percent. The percentage of how much you owe compared to the amount of your credit limit is known as credit utilization. Keep your ratios on both personal and business credit cards below 40 percent in order to maximize your credit potential.
Do pay better than terms.
Paying invoices in a timely manner will earn a business an 80 Paydex® score with Dun & Bradstreet. To earn a perfect score of 100 requires that you pay better than terms with vendors and suppliers. Paying invoices 10-20 days before the due date is essential for building strong company credit ratings.
Don’t forget your business has assets.
Tangible assets such as real estate and equipment are often the collateral used to secure various types of financing. But don’t rule out intangible assets such as your company’s reputation, social capital, brand, and intellectual property. These assets are important and valuable to a company.
Marco Carbajo is a business credit expert, author, speaker and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and AllBusiness.com. His articles and blog, BusinessCreditBlogger.com, have been featured in Fox Small Business, American Express Small Business, Business Week, The Washington Post, The New York Times, The San Francisco Tribune, Alltop and Entrepreneur Connect.