Credit is a business’ lifeline because money is not always in hand when different needs come up like the need for more inventory during a holiday. Access to credit enables a business to maintain a healthy cash flow, which ensures that business operations do not slow down even when sales and other revenues are not coming in as expected.
But access to credit for a business depends on credit history, just like is the case for personal credit. A good credit history enables access to higher loan amounts, revolving credit lines, lower interest rates and cheaper premiums.
New businesses face challenges in accessing credit facilities because their credit histories are unknown. A business owner must work to building a credit history and improving it over time.
Understanding business credit scores
Credit scoring for businesses runs from 0 to 100 where zero is the highest risk and 100 the lowest risk. The scoring is done based on a criteria that looks at:
• Credit utilization
• Outstanding balances
• Payment habits
• Number of trade experiences
• Public record regency, frequency and amounts involved
• Business profile including business size, industrial classification and age
To build a credit history a business owner could:
• Take up credit funding
Short-term credit facilities that would be suitable for a new business include merchant cash advance and revolving lines of credit. The latter are especially useful in showing the consistency of a business in paying back its debts. Credit lines operate just like business cards. The business can borrow at will and pay back at different intervals. Being consistent in payments and payment dates is very useful in building a credit history.
• Using a business credit card
A business owner can apply for a business credit card for mundane expenses such as buying stationery or paying for fuel. Consistent use and repayment of credit on this card will be recorded by the credit bureaus and go into the business’ credit records.
• Consistent payment of bills
Bills that are paid monthly like phone, internet, electricity and gas should be paid at the same date of the month in their entirety. This can be setup easier by having direct debit from the business’ expense account.
If you work with suppliers on a credit basis, ask them to report your payments to the credit bureaus. Some credit bureaus encourage big suppliers with over 500 credit customers to self-report. You can also opt to work with credit suppliers only.
Building and improving the credit score is crucial for any business. It enables the business to take advantage of new opportunities even when cash is not readily available.