When trying to secure a loan for your business or even a business line of credit, lenders usually assess your business credit scores. Building a strong business credit profile can help in determining the success or failure of your business.
Your business credit score shows lenders how you handle your financial obligations. It also affects your reputation and relationship with other businesses and suppliers. Therefore, it’s essential to ensure you maintain a good business credit score all the time.
Here are factors that may affect your business credit score.
When asking for a business line of credit, the lenders will assess your personal credit score and business credit score as this is what they use to gauge your creditworthiness. The lenders want to check if you can be depended upon to pay for the loan when needed. Here is a great resource if you are looking to apply for a business line of credit.
Creditworthiness is determined by your credit history, which includes your repayment history of other debts. Your credit history will also show your past and current loans. Plus the consistency in which your company has been paying them. A good history of loan repayments for past and present loans may give your business a positive business credit score.
2. Characteristics of your business
Your business characteristics also play a crucial role in your business credit score. For example, companies that have been in business for a couple of years will have better credit scores than startups. This is because the business has established itself long enough and has built a credible financial history.
The industry you are in is also another characteristic of your business. Some industries are considered high risk than others. For example, if you are running a real estate business, pharmacy, restaurant, manufacturing, insurance, retail, etc., these are all considered high-risk industries.
Some industries’ risks also fluctuate and may be considered high risk at one time and safer at other times due to market trends or the nature of the business.
3. Credit utilization ratio
One of the biggest factors that influence your business credit score is your credit utilization ratio. The ratio measures your outstanding balances against your available credit across all your accounts.
Percentages usually evaluate this, and you have to maintain it at under 30% of your credit limit. For example, if you own two credit cards with a $5,000 limit on both and you have only spent $3,000 on one credit card, then your credit utilization ratio is 30%.
Lenders usually maintain that your credit ratio should not be more than 35%; otherwise, more than that would indicate to your lenders that you are relying heavily on your credit, which could negatively affect your credit score.
While maintaining a lower credit utilization score is ideal, having a ratio of 0% or 1% shows that your accounts are currently inactive.
Your credit utilization ratio affects your business credit score, and a bad credit score can make it difficult for your business to borrow money in the future.