A credit score plays a crucial role in acquiring funds. Whether you raise funds from investors or direct lenders, you must have a good credit rating. However, the promising benefits of having a good business credit rating are not limited to only accessing funds; it also helps build a reputation. It helps build your trust among suppliers, lenders, creditors, and investors. Unfortunately, it is easier said than done.
There are some entrepreneurs who have either poor credit scores or thin credit files. While many of you think that a no credit rating is better than a bad credit score, the fact is their implications vary. First of all, you need to understand what exactly a business credit history is called.
It is a detailed report that outlines your company’s efficiency in discharging previous debts in the past. Your credit report consists of all types of debts that you took out in the name of a business. In addition, it provides details about the number of inquiries, the amount you owe, and the like.
Credit reference agencies keep a record of your credit information and, based on that, calculate your business credit score. It is between the range of 1 and 100. The higher, the better. You should aim for an 80 score because it helps increase your chances of improving your ability to borrow money.
When is a business credit rating considered good?
A business credit score is considered good when it has optimal debt levels and has been paying all of them on time. The key to a decent credit score is timely payments. When you pay all your bills on time, your credit score will go up.
A clean record is a must in order to maintain a good credit score. The lower the negative inquiries, the better it is. Your credit report does not have too many hard inquiries and the signs of bankruptcy and foreclosure.
However, a business credit score is considered bad when you make late and irregular payments. Payments should be made consistently. Late payments and high levels of credit utilisation are two highly responsible factors why a credit score is too bad.
How a bad credit history affects your business?
A bad credit rating will never work in favour of your business. You should always ensure that your credit rating is stellar. Whether you raise funds from investors or borrow from direct lenders, your credibility will be taken into account. Bear in mind your credibility will be called into question if your credit score is not so good at all. Here is how your bad credit rating will affect the growth of your business:
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Rejection for funding
A business cannot run without cash. It is fuel to a business. Even though you have enough savings to start your business, you might need additional funding requirements to ensure the smooth operation of your business. Of course, you would need a good business credit score to borrow money from a direct lender.
If your credit rating is not stellar, your lender would be sceptical about your business’s repaying capacity. At the same time, there are business loans with bad credit from various lenders. Interest rates will be quite high. Lenders believe you as a risky borrower, and they will charge high interest rates in order to minimise their risks.
Unfortunately, these rates could be so high that there is a possibility of falling into debt. Further, lenders would not want you to have a very poor credit rating. If your score is in a high-risk range, you will most likely be refused. Make sure that your credit score falls within the medium-score range. However, yet, it should be near the low-risk range.
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Less favourable interact rates and other conditions
The entire loan structure depends on various conditions. Not only is your credit score important, but your business’s overall profitability also matters. If your business credit rating is poor, it clearly proves that your business failed to discharge previous debts. It also indicates that your business struggles to generate enough profits and thereby cannot manage to pay off all obligations.
If you manage to apply for a business loan with a bad credit rating, you will end up facing high interest rates. Apart from that, you will be allowed to repay payments in a short period of time. It will increase the size of monthly instalments.
Business loans could be subject to collateral, especially if you are borrowing a larger sum of money, but your lender would expect you to put down collateral even if you borrow a small amount of money. For larger loans, they would expect you to put in a bigger size of collateral.
All these terms and conditions would affect your business profitability down the line. You might struggle to easily meet your business operations smoothly.
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Your trade will be affected
If your business credit score is not within the range between 80 and 100, your suppliers would doubt your repaying capacity. It is crucial to maintain trust so suppliers can furnish you with supplies on credit as and when you need them. Long-lasting relationships with suppliers could help your business grow down the track. You may be able to get huge discounts on various supplies. It would keep your costs low.
However, you must have a good credit rating to ensure that you can avail yourself of all supplies at hefty discounts. In case of a poor credit score, your suppliers would be hesitant to provide you with supplies on credit.
The contract term would be stricter. They might ask you for upfront payments in case you refuse to settle your obligation later. You will also be offered a shorter credit period. Stricter terms and conditions could disrupt your cash flow. Chances are your business operations struggle.
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Higher insurance premium
If your business needs a fleet of cars or any equipment, you will need to buy insurance. You must note that insurance companies decide the premium based on your business credit rating. If they find that your business credit score has not been stellar, you will have to pay a high premium. It will affect the profitability of your business.
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Tarnished reputation
A poor credit rating will always affect your business reputation. A not-so-perfect business credit rating clearly states that your business does not have enough profits. You struggle with money management behaviour. If your business fails to discharge its obligations on time, several reasons could be claimed for it.
As a result, your reputation will be at risk. It will affect your relationship with suppliers. At the same time, your customers would also prefer your competitors’ products. If you want to collaborate with other partners, your chances are meagre. Investors will also hesitate to invest money in your business.
The bottom line
Running a business is not easy. You always need a constant supply of cash to meet your business expenses. You may have to raise money from investors or borrow money from lenders. You will certainly need a stellar business credit rating.
A poor business credit score also puts your reputation at risk. Your suppliers would also not be able to trust you. A bad business credit score has far-reaching adverse consequences. You should try to improve your business credit rating.