Surprising Factors that Can Ruin a Small Business’ Credit

Paying on time, waiting too long to establish credit and other mistakes can hurt your credit scores.
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Successful businesses are the result of patient work and planning, and high business credit scores are no different. (Photo: Dan Kosmayer/Shutterstock)

If you need a business credit card, a line of credit or a loan to expand your business, a low business credit score can hurt your chances of getting what you need on favorable terms. A bad credit history also makes your business less attractive to potential buyers. So maintaining a good credit score is key.

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“Not using a credit line for a long period of time may affect your standing with your creditor, who may choose to either reduce your credit line or close your account altogether.” -David Hall (Photo: David Hall)

A business credit score is like a personal credit score, though the number ranges are different. It’s based on various factors including length of credit history, number of open accounts, average use of available credit and payment history.

Business Equifax, Dun & Bradstreet and Experian Small Business, the three major business credit bureaus, each compute credit scores based on their own criteria. And each uses more than one score. For example, Dun and Bradstreet assigns a credit score, a financial stress score and a PAYDEX score, which is based on payment data and assesses your risk of late payments.

A PAYDEX score ranges from 1 to 100. You will need to file for a nine-digit Dun & Bradstreet DUNS (Data Universal Numbering System) number to get one. You can do that here.

Here are nine mistakes that can hurt your credit.

Waiting too long to establish business credit

Often, small business owners open their doors on a shoestring budget financed through personal investment, or, if they are lucky, a small business start-up loan. The last thing on their minds is establishing additional credit.

However, since length of credit history is a factor in credit decisions, sooner is better. The first thing to do is apply for a DUNS number, since it’s the most widely used identifier for business credit.

Not checking your business’ credit reports

Business credit bureaus don’t always get it right, and a bad score based on incorrect data can hurt you. So it’s important to monitor your credit ratings.

David J. Hall, public affairs specialist in the Office of Communications and Public Liaison at the U.S. Small Business Administration, recommended that business owners check their reports regularly and dispute any errors. “Errors do happen, and when undisputed, they’re akin to acknowledged and therefore have a negative impact on your credit.”

Unlike personal credit reports, which are free to consumers once per year, you will have to pay for your business credit reports. Prices for a single, basic report from each company are as follows: Experian, $39.95; Equifax, $99.99; Dun and Bradstreet, $61.99. Contact each bureau for a copy.

Paying late or even on time

Unlike with personal credit scores, paying on time isn’t the gold standard. The earlier you pay your bills in a billing cycle, the better your PAYDEX score.

Having too many credit lines

Having too many open accounts can have a negative effect on credit because the business is perceived as having too great a chance of overextending. Hall advised, “Avoid unnecessary credit, whether in the form of credit cards, loans or lines of credit.”

That said, avoid the temptation to close accounts you do not use regularly. Leaving the accounts open and active will improve your company’s debt-to-equity ratio.

Not using available credit

“However counterintuitive, not using a credit line for a long period of time may affect your standing with your creditor, who may choose to either reduce your credit line or close your account altogether,” said Hall.

It is good to occasionally use open accounts, especially if you pay the debts promptly.

Carrying high balances

It’s easy to reach for the same credit card over and over again, especially if that card has a good rewards program. But it’s smart to keep balances under 50 percent of the available credit. Use another card if you’re in danger of going over. It can also be advantageous to transfer balances from one card to another to stay within favorable limits.

Mixing personal and business finances

One of the reasons businesses incorporate is to raise a corporate veil to shield owners’ personal assets from creditors. Regardless of whether you incorporate, it’s smart to keep your business and personal finances separate.

You can’t expect creditors to treat the business as a separate and viable entity if you treat it as an extension of your personal finances. And putting business expenses on your personal credit card won’t do anything to establish business credit.

Not maintaining good financial records

To prove to creditors that your business is willing and able to pay its bills, you must keep accurate and up-to-date financial records. Records to keep current include a cash flow statement, a profit and loss statement, inventory of assets and investments and bank account records.

When choosing a credit card, look for companies that offer categorized and itemized statements, or cards that link directly to QuickBooks to make record keeping easy.

Doing business with people with bad credit

If applicable, check the credit of the customers or clients you do business with. You can’t pay your bills if they don’t pay theirs.

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