Over the 20 years I’ve been in business, I’ve noticed only a fraction of business owners pay attention to their business credit profile, but it’s a critical factor to keep watch over.
Although the credit bureaus take their mandate to provide accurate and timely business credit information seriously, mistakes happen. Your business credit profile, unlike your personal score, is publicly available. It doesn’t require the same level of data individualization to report or access your credit history, and it’s possible for similar business names and business addresses to get confused with each other.
For example, a business I purchased years ago had a credit history that was confused with another business that had a similar name and address. The other business’ credit profile was in the toilet, and the confusion negatively impacted my business. This experience reinforced the need to regularly monitor my business credit to catch any possible mistake early to make sure the information being reported about my business was accurate and up to date. This is our responsibility as business owners.
That said, regularly– at least monthly– reviewing these three data points is a good idea.
Your Personal Credit
For most small business owners, your personal credit will likely be part of every business creditworthiness decision, so building and maintaining a good personal score is important. Some financial experts might suggest closing your personal credit accounts is a good practice, but I believe it’s not good advice for a small business owner who needs to demonstrate a good personal credit history.
Many lenders use your personal score to determine if they’ll even consider your business loan application. Most traditional lenders, like banks and credit unions for example, want to see a score over 700, although they sometimes go as low as 680. The SBA’s minimum threshold is 660. There are lenders that will approve a loan if your score is lower than that, but you should expect a higher interest rate and more restrictive terms if approved. Because of this, you should be working to improve your score.
Your Accounts Receivable (AR) and Accounts Payable (AP)
Many business owners aren’t very good at managing their AR and AP, meaning they don’t have very good control of their cash flow. You’re always going to be chasing past-due AR, so it’s important to stay on top of it by looking at it every single day or as much as possible. If your past-due AR is running around 10 to 15 percent, you have a break-even business. Beyond that, you are losing money.
As for your AP, suppliers that offer you payment terms are the most underutilized form of credit the average small business has to manage his or her cash flow. And, if your suppliers report your good credit history to the appropriate business credit bureaus, it’s one of the most powerful ways to build business credit.
Most of the time, all it takes is to ask for payment terms. If you already have them, you should ask for better terms. Your suppliers will likely accommodate you if you’ve been a good customer.
Your Balance Sheet
In addition to making sure all your assets and liabilities are listed correctly, it’s also a best practice to ensure you’re not using your personal credit for business purposes that aren’t included on your balance sheet. This makes it difficult to tell if your business is really profitable or not–for both you and someone evaluating your loan application.
Having accurate and complete information will make it easier to make data-driven decisions about your business’ creditworthiness. And, it will help you build a more profitable and thriving business.