A bad business credit rating can wreak financial havoc on a small business, as detailed in part one of this series, How Bad Credit Can Affect Your Business. In a worst-case scenario, a lack of access to trade terms or bank financing can lead to severe cash flow shortages and ultimately, business failure.
When should you worry? In general, if your company has a credit score of less than 650, it will be very difficult to obtain a business loan. But if your company is suffering from bad credit, there are steps you can take to repair the damage and reposition your business in the eyes of banks and potential creditors as a good credit risk.
The timeliness of your bill payments is the first criterion that credit-rating agencies consider when determining your company’s credit score. Therefore, the first step in repairing damaged business credit is to begin paying all your bills on time. Start by paying past-due balances (including any late fees, penalties, or interest) as soon as you can, and then make a commitment to the timely payment of all future invoices.
Before you can do this, you may need to re-examine your financial and accounting systems to determine exactly why your bills are being paid late. It could be due to a lack of cash, in which case you’ll need to look for ways to boost cash flow by increasing sales and profits and/or decreasing expenses. Or maybe cash flow isn’t the problem. It could be that there are inefficiencies or oversights in your accounting and payables processes and systems that need to be fixed.
Take a fresh look at these systems and try to identify any potential snags to timely payment of invoices. For example, is there a designated person (or people, depending on your company’s size) who receives invoices and is responsible for making sure they’re paid on time? If not, invoices can easily slip through the cracks and not get paid, even when there is enough cash on hand and you have every intention of paying them on time.
Another critical issue in the determination of your business credit score is your personal credit history. The personal and business finances of small business owners are often closely intertwined, so creditors usually want to see a high personal credit score as well as a high business credit score. To see for yourself, go to AnnualCreditReport.com and order a free personal credit report from each of the three main credit bureaus (TransUnion, Experian, and Equifax).
You should also order a business credit report from at least one of the credit-reporting agencies that provides them, such as Experian, Equifax, or Dun & Bradstreet. There is usually a fee to purchase these reports, but the information will be invaluable in helping you to get to the bottom of why your business credit is damaged.
When you receive your business and personal credit reports, look carefully to see if there are any mistakes. Errors and outdated information in credit reports are not uncommon and can lead to undeserved low credit scores. Contact the reporting agency directly to have any errors fixed as quickly as possible.
Finally, you may be wondering about the many credit-repair services that claim they can restore your business credit for a fee. While these services may be legitimate, you should view them with a wary eye. In most instances, you can take steps like those outlined here yourself — without any assistance from a third party — and get your business back on to the road to a strong credit rating.