In a perfect world your business credit score and report will gain momentum and get stronger as the business grows. This is a logical assumption that many business owners make, but it’s not always that simple.
With credit – what you don’t know can and likely will, come back to hurt you. There are many ways that weak or negative business credit can hurt or limit your company.
Higher interest rates and fees:
Having poor business credit puts you in a higher risk category and will cost you on interest. Many business owners get desperate for funding and end up settling on ‘bad credit’ commercial loans with interest rates over 20 to 30%. Lower interest rates translate into greater savings that can be used to offer discounts to customers and increase your profits.
Getting smaller loans and lines of credit:
Some funding is better than none? That may be true, but a low line of credit coupled with extremely high interest and fees can end up putting you in a vicious cycle and ultimately have you working for the lender since they are the ones making all the money.
Assuming you have credit:
Just because you have been in business for 7, 10, even 20 years and have many creditors that you always pay on time, does not mean you have a good business credit score or any score at all. Most vendors and creditors do not report to the Dun & Bradstreet, Experian, Equifax, and other smaller credit bureaus.
Using vendors who do not report:
If your preferred vendors are not reporting payment history to any of the business credit bureaus, then you’re not building credit history. Many business owners make this mistake and do not investigate whether the vendor reports before working with them.
Only monitoring one bureau:
There are three major business credit bureaus: Dun & Bradstreet, Experian, & Equifax, plus several smaller agencies. Every lender and creditor have “preferred” scores and reports, when you neglect any of the bureaus you’re putting your company at risk for denial. Remember, lenders will not always disclose what scores they’re looking at.
Loss of executive talent:
Many sought after executives will do research into your firm before accepting an employment offer. Poor payment patterns and irresponsible financial management is worrisome in the eyes of professionals and may cause them to opt-out of representing the company.
Loss of investors:
Many firms are dependent on outside investments. Good investors are cautious with their money and may screen credit before investing. For instance, many real estate investment firms rely on investors to purchase properties in cash. Without these partners their livelihood would be at stake. Investors may pull out money if scores dip into low risk category’s.
Losses of partnerships and more to competitors:
Poor credit history can deter partnerships and new accounts. They will likely seek opportunity elsewhere. If your company reflects as a high risk, your strong credit-worthy competitors are likely to scoop up customers and partnerships.
Loss or denial of payment terms through suppliers:
Payment upon receipt is often unrealistic, especially if you’re waiting on receivables to pay for goods. Building and maintaining strong credit will give your suppliers extra assurance that you can manage the terms and makes it easier to offer terms to customers. This also allows you to stay away from high cost working capital loans.
Denial of government bids:
Selling to the federal government has a lucrative appeal and government contracting is highly sought after. To have a compelling bid, your business must maintain strong financial records and business credit scores.
Denial of SBA Loans:
Many small companies try and fail to be approved for an SBA loan. These highly sought after options offer smaller down payments, longer payment terms, and lower interest rates than traditional business loans. The FICO SBSS credit score is used for SBA loans which mean that both business and personal credit must meet score thresholds or the loan will be denied.
Damage your business finances:
If your credit is not strong enough to get approval for financing, your business finances can end up suffering- a lack of revenue is a common reason why businesses cease operations. When you get over your head and sales are declined it can be difficult to keep the business afloat. During seasonal slow times many companies rely on financing to weather the storm. Let’s face it, most businesses go through tough times or need an infusion of funding to reach the next level. The cheaper the cost of funds the easier it is to maintain a positive position.
Damage your personal credit:
There are many ways that your business and personal credit can intertwine. If you give a personal guarantee on loans or sign personally on business credit cards, any negative information will show on your personal and business credit. This may impact your ability to take out personal loans and reach personal goals.
Damage your personal finances:
Many business owners choose to mix their business and personal finances. An owner would be personally liable for all guaranteed business debts if the company went under.
Increased insurance premiums:
Commercial insurance agencies use business credit profiles and scores to determine insurance premiums based on the risk of your company filling a claim. Consequently, a business owner may end up paying much higher premiums or even be denied entirely by their preferred provider if business credit scores are weak because they’re considered at high risk of filing a claim.
Without checking and monitoring each business credit score and report, your company credit could be hurting you. There may be delinquencies or negative information that you’re unaware of dragging you into a high risk category. Are your financials, company info, and company code updated correctly? As a result, all these factors could reflect a high risk to the viewer even if they are incorrect. The owner does not need to give consent or even have knowledge of a credit review, so potential partners and investors could be casting judgment without even communicating with your company.