A bad credit score can pose significant challenges for a small business. That low number restricts access to necessary financial resources and can stymie overall growth. Understanding the reasons why your small business has bad credit can help you rectify the situation and improve the financial health of your venture.
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Late or Missed Payments
Creditors and lenders closely monitor payment habits. When a business consistently pays its bills on time, it signals that it is reliable and can effectively manage its financial obligations.
Conversely, when a business frequently misses payment deadlines or fails to pay altogether, creditors grow concerned about its financial stability. Over time, these poor payment habits can seriously damage a business’s credit score.
High Credit Utilization Ratio
A business’s credit utilization ratio is the amount of credit it uses compared to its credit limit. For example, if a company has access to $10,000 in credit and regularly uses $9,000, its credit utilization ratio is 90 percent.
Ideally, businesses should aim to keep this ratio below 30 percent to maintain a healthy credit score. If your business continuously maxes out its credit, lenders may view you as overly reliant on borrowed money.
Short Credit History
Newly established businesses often don’t have long track records of credit use for lenders to evaluate. Without a substantial credit history, lenders may deem a business as risky—resulting in a lower credit score.
As you grow your small business, build a credit history and maintain it. Pay off debts on time and watch how much credit you use to keep your credit score healthy.
If your business has bankruptcies, tax liens, or judgments against it in its history, those records are available to the public, including lenders. These records indicate significant financial difficulties that can put lenders on edge.
Even after you settle these issues and clean up your business credit, these effects can linger on a credit report for several years.
Frequent Credit Applications
Each time a business applies for a line of credit, lenders perform a hard inquiry on the business’s credit report. Too many hard inquiries within a short period can lower your business’s credit score. It indicates to lenders that you’re in financial distress or are not managing your finances responsibly.
Do your best to keep your credit usage under 30 percent. If your business is in financial trouble, seek the assistance of an advisor to help you explore options besides opening another credit card.
The first step toward improving your small business’s poor credit score is understanding why it’s in trouble in the first place. Identify the source of your money problem so you can take action to correct it.