By: Gerri Detweiler
It’s unlikely that a day goes by where you don’t make a decision that will, for better or worse, impact your bottom line. From what vendors you work with to who you hire, each decision sets in motion cash-flow patterns that can affect your revenue stream for months — if not years — to come. However, despite the role credit plays in growing your business, it often takes a back seat to other urgent decisions you have to make.
If you haven’t had to rely on your business credit to this point, you may not see the value in it. But strong business credit can make it easier to do everything from finance purchases to build new relationships, each of which can directly and indirectly bolster or damage your bottom line.
Take advantage of lower interest rates
Many businesses — 43 percent, according to the 2019 Federal Reserve Small Business Credit Survey — find that funding of one type or another is a necessity. For some, a business loan or line of credit may be necessary for growth or expansion. Others may need it to fill gaps in cash flow between invoices or during slow seasons. Regardless of the underlying reason, borrowing money is seldom free. It doesn’t, however, need to be painstakingly costly.
Lenders frequently base interest rates on risk, and since good credit equates to a lower risk, companies that maintain good business credit are apt to have access to more affordable financing options.
Even seemingly marginal rate differences, 2 or three percentage points, for example, can account for significantly higher interest costs over the life of a loan. Further, higher interest rates also likely to yield higher monthly payments, meaning your bottom line will suffer both immediate and long-term losses.
Access the best financing options
There are a lot of financing options out there, but that doesn’t mean lending is a one-size-fits-all encounter. Some lenders may have strikingly low rates but hefty origination fees. Others may have lending packages designed to meet the unique needs of one type of business but not the next. Unfortunately, business lending products aren’t required to and rarely advertise a true APR so you can compare costs in an apples to apples way.
When you choose a lender, credit card, etc., you’re not just choosing an interest rate, you’re choosing applicable fees, penalties, rewards, benefits, and more. Poor business credit limits your choices when it comes to lenders and the actual loan types as well. And while more choices may make decisions challenging, they will inevitably allow you to pick the best and most affordable path for your business.
Avoid funding shortfalls
Just because you’re approved for a small business loan or line of credit doesn’t mean that your financial needs are met. Poor business credit can limit loan amounts, meaning you’ll be forced to seek alternative funding to cover the gap. Or, if you can’t come up with the missing funds, you may need to forgo a purchase that would otherwise lead to a stronger bottom line down the road — new, more efficient equipment or low-cost inventory, for instance.
Strong business credit can increase the chances that you’ll be approved for the funds you need when you need them.
Develop stronger relationships with vendors and suppliers
There are many reasons why you should strive to maintain a strong relationship with your vendors or suppliers, but when it comes to savings and flexibility, it’s all about trade credit.
Trade credit allows you to access goods in advance of payment — buy now and pay later. When used properly, trade credit can help you manage cash flow by extending payback terms that are longer than the grace periods of lines of credit or credit cards. It can also help you buy in bulk or take advantage of sales, promotions, clearance, and closeout prices.
This type of payment arrangement isn’t offered up to just any business, however. There are obvious risks associated with net-30, net-60 and net-90 payment arrangements (i.e., lack of payment), and therefore vendors and suppliers typically limit them to businesses they believe to be trustworthy. A great indicator of trust is your business credit score.
Grow your client portfolio
Many entrepreneurs are surprised to find that in some cases, business credit can impact your effort to create new client relationships. This is particularly true of larger companies, many of which check your business credit to make sure you meet their minimum qualifications. A good example — some big-box stores screen companies who want shelf space in their stores using the Dun & Bradstreet PAYDEX score.
Even if your business is pulling in revenue and otherwise operating successfully, poor business credit can stop you from engaging in lucrative business relationships.
How to Build Better Business Credit
You know that good business credit can boost your bottom line, but how can you get it? In many ways, building business credit is similar to building your personal credit. Here are a few tips to help you.
- Monitor your credit. If you haven’t already, check in on your business credit by requesting reports from the three main business credit bureaus: Experian, Dun & Bradstreet, and Equifax. You can obtain them directly through each company, which requires a fee, or you can access your scores from all three bureaus for free at Nav.
Once you have your business credit reports, make sure that they are accurate. Just like their personal equivalent, business credit reports can include errors. There’s nothing worse than discovering that you missed out on a chance to grow your business because of a clerical error.
- Pay your bills on time. One of the number one ways you can build strong business credit is to create a positive payment history. To do this, pay bills on time, every time. Or, if you can, make payments early. Many business credit scores give you “extra credit” for paying bills before they are due.
- Build strong relationships with suppliers and vendors. As previously mentioned, a good relationship with your vendors or suppliers can help you obtain trade credit. However, that very relationship can also help you build credit as long as the vendor or supplier reports your payments to commercial credit bureaus. Keep in mind that this only works if you have a positive payment history — late or default payments will further harm your credit.
- Open a business credit card. A business credit card has numerous advantages, giving you access to benefits like rewards programs and fraud protection. Many business credit cards also report to business credit agencies, which means that making payments on time can help you build your business credit score.
Good business credit will make it easier to find affordable financing and build strong relationships with the people and companies that matter most to your business. And, because everything from inventory expenses to debt payments impact your bottom line, it is also key to keeping net profits up and costs down.
Gerri’s been guiding individuals through the confusing world of credit for 20+ years. Her articles have been widely syndicated, and she is the author or coauthor of five books, including her most recent, Finance Your Own Business: Get on the Financing Fast Track. She’s Education Director for Nav, which matches small business owners to their best financing options and give them free access to their personal and business credit scores.