Running a small business is a juggling act, and sometimes you have to make tough financial decisions. Have you ever had to decide between making payroll or paying your vendors on time?
Most of us have been there and—for good reason—paying staff usually wins out. But, blowing off your vendors does more than just strain your business relationships. It also hurts your business credit scores.
In a case like this, you may feel like it’s worth the hit to your credit. And I wouldn’t blame you. What you do want to watch out for is doing things that unnecessarily hurt your company’s credit.
It’s one of the main ways that lenders, creditors, and vendors evaluate your financial health.
Let’s explore some of the most common credit mistakes, so that you can avoid accidentally ruining your business’s credibility and hurting your financial health.
Business credit report errors are more common than you think. A Wall Street Journal survey showed that 25% of small business owners who looked found credit-damaging errors on their reports. Without knowing it, these errors could be killing your business credit scores.
Often times, mistakes can be something as simple as incorrect data, like outdated revenue figures or an incorrect industry classification code (SIC). For example, being coded as a “real-estate investment” company carries a higher credit risk.
Another common problem is mismatched business profiles. It’s easy to see why this happens:
Take a little time to review your reports from each of the three main business credit bureaus (Dun & Bradstreet, Experian, and Equifax) to ensure that your information is correct.
When it comes to business credit, even being a little late paying your bills can hurt your scores.
With personal credit, you get 30 days to make your bill payments before it’s marked late and lowers your scores (like a credit card bill). Business credit doesn’t work this way. Making a payment that is even one day late can cause your scores to drop.
Let’s say that one of your vendors offers you net-15 terms, giving you 15 days to make your payment for goods or services they already delivered. If you pay—or they receive your payment—on day 16, they can report you as paying one day beyond terms, which hurts your scores.
Dun & Bradstreet’s PAYDEX score (the primary score used by vendors to evaluate a company’s creditworthiness) is solely based on your payment history. The score ranges from 0 to 100 and the higher it is, the better.
If you pay all your business bills exactly on the date they are due, you’ll get a PAYDEX of 80. To get a higher score, you actually have to pay your business bills before the due date.
When just starting out, it’s common for business owners to rely on personal money and credit cards to fund their new venture. But, maxing out your consumer credit cards to run your business can kill your personal credit scores.
Plus, it doesn’t help you establish strong business credit. Having a thin business credit file can be just as damaging as having poor credit.
One of the first things you should do after starting a business is open a couple business credit cards. Just be sure that the bank issues the card in your company’s name and reports to your business credit, not personal. You probably won’t qualify for a big credit line at first, but that’s fine. It’s helping you build business credit, which will let you secure more capital over time.
A business can typically access 10 to 100 times more credit than a consumer. You’ll need this extra credit capacity. On average, businesses use credit at ten times the rate of a consumer. It’s nearly impossible to scale a business by relying on personal credit alone.
A common way that business owners trip up their credit is by only checking it when they need to use it. Your vendors and lenders continually monitor your business credit, and so should you. This doesn’t mean you have to add more work to your plate.
Free business credit monitoring tools exist that keep watch of everything for you and will send alerts if something changes. Credit scores typically don’t change much, so a significant drop could be an indication that something serious has happened, like identity theft. Small businesses are just a susceptible to it as consumers.
Don’t shoot yourself in the foot by making avoidable credit mistakes. It’s not hard to take these steps, and they can save you a lot of stress down the road.