While your personal finances should refrain from relying on debt to improve, the same is not true for businesses. Debt is a natural occurrence in any business financing because it help propel the company towards the improvement that it requires to earn more profit. Here is a video from the Council for Economic Education and it discusses how a debt actually helps a business grow.
Despite the obvious benefits, debt should never be taken lightly. You need to make sure that you understand how to take care of your company’s creditworthiness.
Business creditworthiness is an important part of any company finances because it tells a lot about how you manage your money. When you need to borrow a new loan to improve your business, a good credit history will allow you to get a low interest on that loan. It will keep you from wasting any money on the interest. Not only that, this is also something that potential business partners look into.
An article published on Entrepreneur.com defined this as stretching the working capital of the company. Different type of debts can allow business owners to get the cash that will fund programs and upgrades that will help improve the company’s ability to generate profit. The increasing revenues of a business is the best measurement of its success and that is the goal of any entrepreneur.
In order to maximize the benefit of credit, you need to make sure that you are taking care of your business creditworthiness. Some people may think that this is merely about paying your dues on time. While that is very important, there are also certain mistakes that business owners make that is also affecting their respective credit opportunities.
7 mistakes that may be costing your business credit opportunities
While credit management is an important part of maintaining a good credit reputation, you should not only focus on this. There are other errors that you may be committing and some of them are actually quite simple. The mistakes will vary based on the specific business that you run. However, here are 7 common mistakes that you should try to avoid.
- Your company’s entity structure. A business will be defined by its entity structure: sole proprietorship, corporation or LLC (Limited Liability Company), etc. This will determine how you will pay your taxes, your personal liability to the company as the owner and how you can raise the funding that your business will need to grow. If you have a sole proprietorship, you need to understand that your personal finances will affect your business creditworthiness. It can keep you from a good deal on your loan if your personal money is in shambles.
- You company’s SIC code. This is the Standard Industrial Classification Code. All business types are given this code in order to determine if they are a high risk business or not. If your business is very risky, that will limit the opportunities that you have in transacting with lenders and even investors.
- Your company’s supplier credit. You ability to pay your suppliers is one way to improve your business creditworthiness. But the thing is, not all suppliers report to the credit bureaus. Some who do submit reports do not do so on a monthly basis. You may want to ensure that your suppliers can help you build your credit by reporting to the credit bureaus.
- Your company’s business data. First of all, you need to make sure that all your public data is updated. If you changed your number, you need to have this listed in the 411 nationwide directories. Some lenders and financial institutions expect potential borrowers to adhere to this corporate compliance. Not only that, giving incorrect and incomplete information in any credit application will also result in the disapproval of your loan. This may seem like a trivial thing but it can affect the approval of the debt that you want to borrow.
- Your company’s bank records. A company with bad bank records will definitely not have a good credit standing. This can affect your ability to get a line of credit with a financial institution. Make sure you know the maintaining balance that will allow you to achieve a great bank record.
- Your company’s credit cards. Business credit cards do not always report to the credit bureaus. Surprisingly, a lot of business owners do not know this. Make sure that you do not focus too much on the rewards and the perks of the card and check if they will report your payments to the major credit bureaus too.
- Your company’s separate credit history. The last factor that can affect your business creditworthiness is the separation of your personal and business credit. Whether you have a sole proprietorship or not, make sure that the terms and conditions of the creditor indicate that they will report your credit history in the right credit file. Otherwise, you might find it hard to keep your personal financial struggles from affecting your business.
According to the FederalReserve.gov, the nonfinancial business debt in the country rose by 7.3% in the first quarter of 2014. This is considered to be a higher increase compared to the 6.6% growth of business debt in the last quarter of 2013. This is proof that businesses are increasingly relying on debt to help move their company to the next level. While that may be considered a good sign, business owners must never forget how important it is to take care of their creditworthiness.
Be cautious of your business credit standing
According to Gallup.com, business owners, especially small business owners, are displaying optimism when it comes to their business. This is a good sign as compared to their state during the Great Recession. The survey revealed that company’s increased their business debt because it was easier to do so. 32% of small business owners mentioned that it was easy for them to get credit in the last year and 38% expect that it will continue to do so in the next 12 months.
While a lot of factors may affect the loose restrictions in credit borrowing, one can assume that lenders are more confident to lend because of business creditworthiness.
To help maintain a good credit file for your business, here are some tips that you may want to follow:
- Have diverse credit accounts. These include business credit cards, lines of credit, and business loans. This can help raise your credit standing.
- Be careful about credit accountabilities. While having diverse credit accounts is good, it should be done wisely. Never borrow more than what you can afford to pay off. If you are using a credit card, make sure it will not end up requiring you to get business credit card debt relief. Manage your credit well and make sure that all of them have a purpose on your business. If not, then get rid of them.
- Make timely payments towards your debt obligations. If your profits are not enough, you may want to research on your options to get business debt relief. For instance, if you are racking up too much credit card debt, you may want to talk to your credit card issuer and ask for a lower interest rate.
- Monitor your credit file. Maintaining your business creditworthiness is only possible if you monitor it regularly. That is how you can see if you are slipping or improving.