When you apply for a new credit line or request a credit limit increase for your business, suppliers, creditors and lenders want to see how your company has handled its existing credit obligations in the past. This enables them to determine if they should approve your request and to help determine what terms they should offer.
Lenders often use business credit scores to help them assess the level of risk a company presents. Business credit scores are calculated based on the information in a company’s credit report. In most cases, higher business credit scores mean lower risk to a lender when extending credit to a business.
Your business credit scores are calculated by a statistically derived algorithm, designed to calculate risk based on a variety of factors. Although each business credit reporting agency has its own unique scoring models, scores and ratings, other types of information – such as financials, payment history and credit diversity – all play a role in the strength of your business credit reports and scores.
Here are five reasons that may prevent your business from getting the credit it needs:
1) A weak or incomplete business credit profile – The report and demographics of a company play an important role in how creditors assess creditworthiness. A business with issues such as poor financials, outdated registrations or high-risk industry classification codes can trigger a denial of credit or unfavorable credit terms. So it’s vital that your company’s documents, financials, filings, and registrations are complete, accurate and up to date.
2) Limited or negative payment history – Your payment track record demonstrates how well your company handles its current and past credit obligations. A company with limited or negative payment history will have a difficult time getting credit.
Aside from paying invoices in a timely manner, keep your credit usage consistent. Regular purchases and timely payments are what establish a positive payment history; it’s what lenders want to see.
3) Low credit limits – Low credit limits across multiple accounts plainly reveal to creditors that a business has limited credit capacity. However, a business with high credit limits reveals that it has the ability to handle large credit obligations. As a result, a business will receive much larger credit limit recommendations, especially if the company has low revolving debts. If your company has a positive payment track record with an existing supplier or creditor, it may be in your company’s best interest to request a credit limit increase.
4) High credit utilization ratio – While the size of credit limits reveal what amount of credit your creditors are willing to extend to your company, credit utilization ratios show how well your business manages it. Creditors view a high credit utilization ratio as a business with excessive debt with a greater risk of default.
Keep credit utilization ratios at 50% or below to avoid falling into this high risk category. Low credit utilization is a clear indication that your business can handle its credit obligations. Doing so will ultimately benefit you during the credit application process.
5) Lack of credit diversity – The types of trade lines your business has reporting play a substantial role in the credit granting process. Limited credit diversity may limit your company’s ability to qualify for certain types of funding. Having short term financing, revolving accounts, installment loans and open accounts reveals to creditors that your company can manage various types of credit responsibly.
Bear in mind your business credit scores will certainly have the tendency to fluctuate with each business credit agency, so it’s vital to monitor your business credit profiles on a regular basis. While business credit reports and scores are an essential tool for lenders, suppliers and creditors to assess credit risk; other factors such as banking history, revenues and personal credit scores may play a larger role if a business lacks depth, diversity and density in its files.