Credibility and Success
A business’s credit score is basically a numerical value that represents the likelihood that it will repay its debts on time.
It is based on a number of factors, including its history of debt management, how much of its available credit is in use, and the value of its assets in relation to the amount of its debts.
Most business owners are aware that having good credit makes it easier to borrow money, but it has other effects, as well. So, why is having a favorable credit rating so important?
Cost and Availability of Capital
This is, of course, the most obvious benefit of having good credit. A business with a favorable credit file will find it easier to qualify for business loans, business credit cards, and lines of credit.
And while companies with less favorable credit ratings may also be able to borrow money, the cost of doing so will be higher for them. Not only that, but their options are likely to be more limited.
This is because lenders want to ensure that the loans they make are sound investments. The higher the credit rating, the lower the risk to them, and therefore, the lower the cost of borrowing.
This goes hand in hand with the above section. Of course, if a business is prevented with a time-sensitive opportunity that requires quick access to capital, having good credit is a big advantage.
However, the need for an excellent credit rating goes beyond situations like these. In fact, certain business entities will only engage in commerce with businesses that have good credit. Suppliers, clients, contractors, and government agencies may take a company’s credit rating into account when deciding whether or not to do business with them.
The reason for this is basically the same as the reason lenders pay such close attention to credit ratings. They want to do business with companies who have proven themselves to be trustworthy and punctual when it comes to repayment of debt.
Having access to cash flow during difficult times makes it easier for businesses to stay afloat, and to outlast their competitors. However, some small business owners make the mistake of only realizing in hindsight just how important it is to build credit early on. Then, they find themselves unprepared to weather seasonal fluctuations in business, unforeseen hardships, or unexpected costs.
At times like these, having access to credit at reasonable rates may be the only thing that prevent a business from going under. The problem is that lenders are much less likely to loan money to a business in trouble, than they are to loan to one with a healthy balance sheet.
This, of course, goes double for companies which are facing hardship, and have scant credit history. Thus, it is imperative that business owners are constantly mindful of building credit, during any phase of business development.
What You Can Do
As a business owner, you know you should build good credit, but you might be unsure of how to do so. Fortunately, there are steps you can take to help you get started.
One of the first should be to establish a D&B D-U-N-S® number. This can be accomplished through Dun & Bradstreet, the leading business credit bureau. This will allow your business to build a publicly available credit file that you can update with favorable credit references. Having a D-U-N-S® can help your company build business credit, and may also enhance your company’s credibility in the view of other businesses and lenders.
Then, apply for vendor accounts, such as those that will allow your company to purchase fuel or office supplies on credit, and then repay them at the end of each term. Pay your balances as early as possible, and make sure your vendors are reporting your payment history to the bureaus. When this happens, the responsibility that your business shows in paying off its debt in a reasonable amount of time, if not early, will be reflected in your PAYDEX® score. Based on a rating system from 1-100, the highest scores tell prospective lenders that businesses make safe candidates to receive credit.
Once you have established good payment history with your vendors, your business should qualify for other forms of credit, such as business credit cards, lines of credit, and business loans. All of these, if managed properly, will further enhance your business’s credit rating.
[Photo Credit: DailyRosetta]