Mastering Business Credit: Strategies for Building and Managing a Strong Credit File

The ability to open a business credit file is essential for any organization.

Opening and maintaining a solid credit file helps businesses access the financing they need to grow. But the process can be challenging and complex. 

In this article, we'll cover all the basics of getting started on building your business credit profile and how to manage it.

What Is a Business Credit File?

A business credit file is a record of your company's financial transactions. It can be used to make business purchases and obtain loans. It also serves as a way for lenders to gauge how well you manage your finances. This helps them determine whether they should lend you money in the future.

Apart from your business' open accounts, credit limits, and balances, the report may contain other details about your business. There could be information about the company, your sector, and your company's business and public payment bills index.

Key components of a credit file typically include:

• Credit score: Like individuals, businesses are assigned a credit score based on their credit history and financial behavior. Lenders use this score to evaluate the likelihood that the company will repay its debts.

• Credit history: A detailed record of the business's credit accounts, including loans, credit cards, and trade credit with suppliers. This includes information on the amount of credit extended, current balances, and payment history.

• Public records: Information from public documents, such as bankruptcies, liens, and judgments, that may impact the creditworthiness of the business.

• Company information: Details about the business, including its structure, industry, size, and affiliations.

• Payment performance: A record of the business's payment behavior, including whether payments are made on time or if there are any delinquencies.

• Credit inquiries: A list of entities that have accessed the business's credit report. Too many inquiries in a short period can negatively impact the credit score.

Strategies for Building a Strong Business Credit File

Your credit score is based on the information in your business credit file. Hence, you must understand how to build and manage a strong one. The scores you get are based on what business reporting agency is reviewing your file.

For most renowned agencies like Dun & Bradstreet (D&B) and Experian, the scores range from 0 to 100. However, for some agencies like Fair Isaac Corporation (FICO), the scores are given between 0 and 300.

The better your business credit score, the better contract terms you can get when applying for loans. Thus, you must pay off debts early without allowing them to pile up.

Here are some effective strategies to build a strong credit file:

Establishing a Business Credit History

You can establish a business credit file by applying for small-business loans and lines of credit. You won't need much personal financial information, but you must provide information about your business.

You can also open a business credit card account in your name and use it to make purchases on behalf of your company. This will help establish some personal history with lenders and demonstrate that you can handle debt responsibly. However, it is advised to keep your personal and business credit separate.

Having separate business credit will ensure that if your personal credit is bad, it will not significantly impact your company's finances. According to eCredable, you can easily build business credit without using personal credit. All you need to do is establish your business's identity, get an EIN, open a bank account, and apply for a DUNS number.

If you have no experience applying for credit, contact one or more banks or other lenders. They can help you walk through the process before applying online or over the phone.

Responsible Credit Utilization

Credit utilization is the percentage of your credit limit that you are using. If a business has a $10,000 credit card limit and only uses $3,000 on that card, its utilization ratio is 30%. A high utilization ratio can mean trouble because it indicates that the business has maxed out its available credit. This could suggest to the lenders that you may not be able to pay off your debt in full each month.

Here's how responsible credit utilization contributes to a strong credit file:

• Credit score impact: Keeping your credit utilization low, ideally below 30%, can positively impact your credit score. Credit scoring models generally view lower utilization as a sign of responsible credit management.

• Demonstrates responsible credit management: Maintaining a low credit utilization ratio demonstrates to creditors that you can manage your credit responsibly. It indicates that you are not overly reliant on credit and can handle your financial obligations.

• Lowers risk perception: From a lender's perspective, a lower credit utilization ratio reduces the perceived risk of lending you money. If you consistently use a small portion of your available credit, it signals that you are less likely to face financial difficulties ahead.

• Improves creditworthiness: You become more creditworthy as your credit score increases due to responsible credit utilization.

• Enhances access to credit: A strong credit file with a history of responsible credit utilization increases your chances of being approved for new credit. Lenders are likelier to offer favorable terms, including lower interest rates, to businesses with a positive credit history.

• Financial flexibility: Maintaining low credit card balances provides you with financial flexibility. It means you have room in your credit limit for unexpected expenses or emergencies without negatively impacting your credit utilization ratio.

• Long-term positive impact: Consistently practicing responsible credit utilization over time contributes to the long-term health of your credit file. A positive credit history built on responsible credit management can have lasting effects on your financial goals.

Diversification of Credit Types

Diversifying your credit is a great way to build a strong business credit file. This strategy involves opening different accounts, such as credit cards and loans, with various lenders and funding sources. This will help you avoid having all of your financial eggs in one basket.

For instance, suppose one lender decides to close an account or raise its interest rate. In that case, it won't have as significant an impact on your overall financial situation. This also means applying for loans from different types of banks and lenders.

According to data from Experian, the interest rates of SBA 7(a) loans are between 5.5% to 11.25%. On the other hand, traditional bank loans have 2% to 13% interest rate. Online business loan providers seek the highest interest rate that ranges between 7% to 100%.

Managing and Maintaining a Strong Business Credit File

Keeping your business credit file healthy is the best way to avoid being compromised. To do this, you'll need to ensure that all of the information in your file is correct and up-to-date.

Here are some tips that can help you do so:

• Keep tabs on any changes or updates made by lenders or other parties with access to your business's information. This includes banks, credit card companies, and utilities like electric companies.

• Monitor how much debt you carry and how much money is owed against each account. This will help you identify potential problems before they become real issues.

• If there are any errors on one or more bureau reports, due date them immediately so they can be corrected quickly.

• Paying off balances quickly will help keep utilization low. This is especially true if those balances represent accounts with high-interest rates, such as payday loans or cash advances. Such loans usually have high annual percentage rates (APRs). However, the good news is that some US states have a cap on the payday interest rate at 36% or lower. But for others, the rates are pretty high. Texas has the highest payday loan rate of interest in the US, at 664%.

Conclusion

As we've discussed, a business credit file is an essential tool in your financial arsenal. It's also a valuable resource for lenders who want to see how responsible and trustworthy you are before lending money. Hence, it can help both parties and ensure that you get finances for your company easily and quickly without any hassle.