Credit scores continue to fall due to the current state of the economy. More borrowing and less ability to make payments can drop your credit score despite your best efforts. While a big business can work around this issue, bad credit can be fatal to a small one. But what does this mean for small companies, and what can be done to ensure your business doesn’t crumble under the pressure?
Credit score decline
The current economic decline is harrowing for most companies. Supply chain disruptions are affecting businesses worldwide and resulting in raw material shortages and shipping difficulties. Compounding the problem is inflation, contributing further to falling credit scores.
Even without taking on more debt, many companies are struggling to make their payments. To compensate, more businesses must borrow or open credit. With borrowing increasing and fewer funds available, small companies are hit particularly hard.
Small business impact
Credit is necessary for keeping a business afloat. It determines how much financial trust you have earned and thus what loans you can get and where you can rent or buy property — among other things. In the current economic climate, late and missed payments may be unavoidable, resulting in the lowering of the company’s commercial credit score. With a low credit score, a business can find it difficult or even impossible to obtain the loans and other necessities it requires.
Even if a small business can get a loan with a low credit score, it will likely have to pay higher interest rates and fees than a company with a higher credit score. This can increase the cost of borrowing and make it harder for the business to achieve profitability.
Small companies looking to attract investors may also discover it is more challenging to do so with a low credit score. Investors can view a low credit score as a sign of financial instability or an inability to manage finances effectively, which can make them hesitant to invest in the company.
Some suppliers may even require a company to have a certain credit score to do business with them. If a small company has a low credit score, it may be limited in its options for suppliers, which can impact the business’s ability to source materials or products at competitive prices.
What can be done?
Unfortunately, one small business can’t fix the economy. So what can be done to mitigate the problem?
Communication is key. It’s the basis for any good relationship, from personal to business. A borrower-and-lender relationship is no exception. By building and maintaining a good relationship with your lenders, you can discuss any issues affecting your ability to make payments on time. Your lenders may be willing to work with you to help lessen the damage to your credit score.
You also can reach out to credit professionals for guidance. Getting an outside opinion can help you address your current credit problems, find ways to boost your credit score, and plan for future issues.
In times of economic uncertainty, credit scores often suffer. While this can be devastating for a small business, it’s not an unfixable problem. By being transparent with your creditors and communicating with commercial credit professionals, companies can minimize the risks associated with a lower credit score.