Having a high credit score for your business is advantageous in several ways. The credit score of your business plays a crucial factor in determining your chances of loan approval. It boosts your eligibility while applying for business loans, credit cards, and other business credit. It also determines the cost of borrowing, helping you score better interest rates on future loans.
Unfortunately, many business owners unknowingly make grave blunders that impact the credit score of their business. These mistakes not only affect the credit score of the business but also turn out to be costly in the long run. Low credit scores not only make it difficult to secure loans but also lead to an overall increase in the cost of borrowing.
So, it’s vital to ensure that you avoid these common mistakes that damage your business credit score. In this article, we walk you through the common mistakes that ruin your business credit score and the ways to avoid them. Let’s get started!
Mistake #1: Making Late Payments
This is a cardinal sin and must be avoided at all costs. Whether you're repaying the EMI of a business loan or settling the outstanding bill of a business credit card, make sure that you're always on time.
Every time you make a late payment, your business credit score takes a hit and drops by a few points. Ensure that all outstanding payments are settled on or before the due date to avoid a declining credit score.
How to Avoid It: Inculcate the habit of settling bills and payments before the due date. If you're forgetful, you can set up the auto-debit feature on your bank account or use reminders on your phone to alert you before the due date.
Mistake #2: Providing Guarantee for Someone Else's Loan
This can land a huge blow to your business if the borrower doesn't repay the loan on time. Business owners often provide a guarantee for the loans of others – family members, an employee, a friend, etc. In these situations, if the borrower fails to repay the loan on time, it not only impacts the credit score of the borrower but the guarantor as well. In this case, your business' credit ratings take a hit.
How to Avoid It: Be cautious when deciding for whom you're co-signing a loan. Make sure to check the borrower's financial history and his/her ability to repay the loan before agreeing to be a guarantor.
Mistake #3: Closing Old Credit Cards
This is one of the common mistakes that business owners make unknowingly. Closing an old credit card can lower your credit score. Wondering why that happens? When you close an old credit card, it erases the associated credit history from your financial report. Let's say that you have a credit card for ten years. When you close it, it eliminates the associated ten years from your credit report.
The length of credit history is one of the many factors that determine your credit score. Now, when you close the card, it automatically removes the years of credit, thereby leading to a drop in your business credit score.
How to Avoid It: To avoid losing the good credit score that you currently have, it’s highly recommended that you keep old credit cards open, even if you don’t use them.
Mistake #4: Not Checking your Credit Score and Credit Report Periodically
As a business owner, you need to track your credit score and credit report periodically, say once every three or six months. Besides helping you understand where your business stands, this practice makes it easy to spot any errors in your credit report. Failing to check your credit report makes it difficult to rectify the mistakes, if any, on your credit report. If you notice any error in your report, you can bring it to the notice of the relevant credit agency to get it rectified.
How to Avoid It: CreditMantri offers a free Business Credit Health Check. You can use our service to check the score and rating of your business periodically.
Mistake #5: Utilising the Entire Limit on your Business Credit Card(s)
As a small business owner, you have to follow this golden rule – never use the entire credit limit available on your business credit card. When you do so, it automatically raises your credit utilisation ratio. This is one number that you want to keep down. Higher the credit utilisation ratio, the higher the risk of your credit score dropping down.
Business owners often falsely assume that using the entire limit on a credit card doesn't impact the credit score, especially when they settle the outstanding bills on time. Sadly, this isn't true. When credit agencies notice a higher utilisation ratio on your cards, they see it as a sign that you're desperate for credit. It indicates financial trouble, which doesn't spell well for your credit score.
How to Avoid It: Try to keep your credit utilisation ratio low. The golden number is 30%. If you are swiping your credit card a lot, you can also consider getting a debit card for your business to handle day-to-day expenses. This ensures that your credit utilisation ratio stays low.
Mistake #6: Being Scared of Credit
This is another common mistake made by entrepreneurs and business owners, especially those just getting started. When you fail to use credit, you miss out on crucial opportunities to build your credit score.
To build a good credit score, you need to demonstrate that you can handle credit responsibly. By availing a business term loan or using a business credit card and repaying the EMIs and bills on time, you show that you can manage credit responsibly. The aim here is to show lenders and credit agencies that you’re on-time with your payments. This works in your favour and boosts your credit score significantly.
How to Avoid It: If you’re new to the business and don’t have a credit history, then taking a short-term business loan and repaying it on time will help you build your business credit score.
Mistake #7: Opening Multiple Credit Cards for your Business
Having too many credit cards for your business is not ideal. When you open several credit cards within a short period, it indicates that you’re hungry for credit. This is likely to drop your business credit score.
How to Avoid It: It's highly recommended that you use only a couple of credit cards for your business. So, before applying for a new credit card, make sure to check the reviews, analyse the features, and decide whether it's the right choice for your business. Don't be tempted to open a card just for the signing bonus or other short-term rewards.
Be Cautious and Avoid these Common Mistakes
Having a good business credit score is beneficial in several ways. It not only makes it easier to avail future loans but also helps you score the best interest rates on your loans and other credits.
Make sure to avoid these seven mistakes listed here so that you don't damage your business credit score unknowingly. You can follow the tips we have provided and avoid making these costly mistakes that ruin your business credit score.