The dream of being self-employed is often on the minds of entrepreneurs. In order to do this, we must turn our savings into substantial investments such as a small business. A successful company needs to have credit that is worthy of the business. With a good business credit score, your business is able to achieve much more and it can do so much more easily than if your credit score is low.
There are several advantages to having a good, or excellent, business credit score. Advantages of good business credit scores include lower interest rates on loans, higher lines of business credit, lower finance charges on business credit cards, and supplier financing abilities. Additionally, a higher credit score can get you lower insurance premiums, higher credit limits, and attractive offers from lenders, and opportunities for credit from new or existing suppliers.
Unfortunately, not all small business owners have great credit due to a number of reasons like making small mistakes when working with their credit cards. While these mistakes may go unnoticed by business owners, as soon as the credit bureaus get wind of them, business credit is often damaged. For this reason, here are 10 common mistakes made by entrepreneurs that frequently damage their business credit and what you should do to avoid them.
1. Being a Co-Signer for Someone Else
It is understandable if a friend or relative approaches you to be a co-signer on their loan that you would want to help them out. Unfortunately, by doing so, you put your business credit in jeopardy in the event that they default on the loan for any reason. When you co-sign on a loan, you are then responsible for it if the borrower defaults on the loan or cannot pay it back in an acceptable about of time.
When deciding to be a co-signer for someone, be certain of the person’s ability to pay back the loan. Double check whether they can be trusted to pay it back, whether they actually have enough money to do so or make enough money to be able to, as well as how they plan to pay the loan back and if it a solid plan that will not affect you negatively.
2. Ignoring Potential Warning Signs of Credit Problems
Another huge mistake that business owners often make is to ignore the warning signs that their business credit could be in jeopardy. This can be avoided by checking your credit monthly to see if anything has changed that could affect your business credit. Most often, individuals and business owners only check their credit one time a year, but this could prove to be a fatal business making mistake, and your business credit could be affected greatly. You will need to make sure there are no errors on your credit reports to could cause a negative result to your business credit, this is why checking them often is recommended. The longer you wait to fix any errors found, the longer it will take your credit to be repaired.
Some other warning signs you should be aware of and promptly tend to include being allowed to make minimum payments, payments that seem to be missing, zero-rated business credit cards, and zero-rated balance transfers. When you ignore these signs, you risk irreparable damage to your business credit rating.
3. Closing Old Credit Accounts
Closing old credit accounts and disposing of old credit cards can also be damaging to your business credit. Why? Because once you close these old accounts, their positive payments disappear also. This means that if one of your old credit cards had an excellent payment history, you lose all that time and proof of good payments as soon as you close the account, which can be damaging to your current business credit score. Instead, keep their accounts open, even if you do not plan to use them any longer or they are paid off. This way the payment history is still available for creditors to see, and it will not affect your credit score negatively.
4. Missing or Making Late Payments
Missing payments or making late payments can affect your business credit, this is a given. A huge determining factor in your credit score is the history of payments you have made to various retailers and such. How late you make your payments, or even how early can have an effect on your business credit score, as well as forfeiting any payments.
Many people have the misconception that missing a payment or two or making a late payment or two will have no effect on their scores. However, that idea is wrong. Everything you do with your payments will affect your score, and it is up to you to ensure the effects are positive, not negative.
To help keep your business credit in good standing, you must make payments on time and you also need to be sure that any money that you are owed from customers or suppliers is paid promptly and on time so that you can pay your suppliers and vendors properly. Should a missed payment occur to one of your vendors, you can try to engage them in what is called a “gentleman’s agreement” by asking that they not report the missed payment to the credit reporting agency. This small step can help keep your business credit rating in good standing.
5. Maxing Out Your Credit Cards
As an entrepreneur, you should never max out your credit cards, ever. In doing so you will raise your credit utilization ratio. The higher the ratio, the higher chance you have of damaging your credit. While you may think that using more of your credit limit but paying it off in a timely manner will not hurt your rating, the credit bureaus look at is as an increase in your utilization ratio.
Credit bureaus do not expect you to max out your cards and use all of the limit they give you. In general, you should only use 30% of the limit they have given you. When you go above 30%, credit bureaus think that you may be having financial issues. A good idea is to have a debit card that you use as well if you utilize your business credit card frequently. This way your ratio stays lower and doesn’t put you at risk.
6. Failing to Use Your Credit
Not using your credit can actually affect your credit rating, and not in a positive way. You actually need to show a credit history that includes on-time payments to be reported to the credit bureaus, so not using your credit can have a negative affect on your business credit.
Generally, in the first six months, you have your business credit, you need to show the credit reporting agencies that you have at least one account open an active, even if it means only using your credit card once a month. What this does is show the agencies that you pay on time and on a monthly basis.
An idea to consider is to automate one of your monthly bills to be paid by your business credit by way of your phone. In doing this once a month it will improve your business credit score over time, and it is a good way to use your business credit.
7. Sharing Your Credit Card Number
Anytime someone asks for your credit card number, do not give them the information. There is too much identity theft in the world to trust just anyone with valuable information such as your credit card number. Any requests for your credit card information whether in person, snail mail, or email, you should never give it out. Scammers are always on the look out for ways to use someone else’s credit cards, do not give them the opportunity to ruin your business credit or raise your utilization ratio.
Should this happen to you, contact your credit card company immediately so they can take action before any damage is done.
8. Opening New Credit Accounts
Just because new credit cards are always being offered to you promising lower rates, rewards, or higher credit limits doesn’t mean you should open a new credit account every time you get an offer. What some people do not know is that by opening too many credit accounts in short periods of time can also bring your business credit scores down.
A simple solution to remove the temptation of opening new accounts is to put any offers you receive in the trash or spam folder. Out of sight, out of mind, it’s as easy as that.
9. Taking Too Long to Shop for the Best Rate
Shockingly, when you take too long to shop around for the best rates on auto loans, mortgage loans, business loans, and other loans, it can actually lower your business credit rating. The best way to stop this from happening is to shop around for a shorter period of time. As a rule, any inquiries made on your account that take longer than 30 days could lower your score.
Being aware of these nine mistakes and avoiding them is the best way to ensure your business credit score remains in good standing. Each of these mistakes can damage your business credit terribly. You may have to make sacrifices to adhere to them, but by doing so your credit rating will remain in good standing with credit reporting agencies, which can help with making your business successful.