When evaluating the creditworthiness of a business, it’s common for lenders to check its credit score. Commercial credit ratings are an easy shortcut to a lot of financial information regarding a potential partner, and it gives a clear picture of the risk involved in extending commercial credit. It’s vital for every business to maintain a healthy business credit score.
The importance of a commercial credit score
A business credit score is an immediate result of separating personal and business finances — which is the safest approach for protecting personal finances when starting a business. Scores are used to determine the creditworthiness of a business. As such, there are significant benefits to maintaining a healthy commercial credit score. Benefits include:
- Increased buying power
- A positive business reputation
- More financing opportunities
With all this in mind, it’s easy to see why a healthy commercial credit score is paramount to business success.
What factors influence business credit score?
There are multiple systems for determining business credit score, and each uses their own method of evaluation, but there are a few contributing factors consistent to all of them. These include:
- Credit capacity. Commercial credit capacity is evaluated by examining a company’s positive cash flow, additional resources, bank records, and payment history.
- Personal capital investment. An owner’s willingness to invest their own money in the business speaks to their willingness to repay commercial credit loans.
- Debt to equity ratio. The amount of debt a business has accumulated evaluated in contrast to the amount of equity it has built.
- Company conditions. What’s the market potential? Is the industry viable? What about competition and market position? How much experience does the business owner have at their disposal?
- Credit utilization ration (CUR). A company’s CUR compares how much commercial credit was offered versus how much was actually used.
All these factors contribute to a company’s commercial credit score, and maintaining a healthy score depends on the awareness and active cultivation of each one. What can a business do to maintain a solid commercial credit rating?
Business credit score maintenance
Understanding the factors that contribute to a healthy commercial credit score is one thing, but taking action to maintain credit health is another thing entirely. The first and easiest step is checking your business score. There are multiple credible ranking organizations, so don’t rely on a single source for commercial credit scores. Whenever possible, check scores on relevant ranking systems before applying for credit. The next — and most obvious — step is to make payments on time. As with personal scores, timely payments are incredibly valuable to business credit health.
Additional steps for maintaining commercial credit health include:
- Building relationships with suppliers. Trust between a business and its suppliers goes a long way toward boosting commercial credit scores and preventing supply scarcity.
- Minimizing credit applications. Frequent borrowing implies a business is low on funds. Limit commercial credit use and avoid closing credit accounts. Paying off an account boosts commercial credit scores, but closing accounts has little to no commercial credit impact.
- Avoiding legal complications. It should go without saying, but a business with legal liability issues is not a sound commercial credit risk.
A healthy commercial credit score helps a business build and preserve financial stability and a solid reputation. Building and maintaining your company’s commercial credit health is essential to long-term business success.