Business Finance

7 Mistakes Business Owners Make That Hurt Their Credit

Mar 30, 2020 • 5 min read
Business owner checking their credit score
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      A good business credit score matters in more ways than one. The better your credit rating, the easier it may be to get approved for tradelines with vendors. If you need a business credit card or loan, good credit can help you get approved and land the best interest rates. The trouble is that you could be doing things to hurt your credit without even realizing it. If maintaining positive credit history is a priority for your business, here are the top mistakes to avoid. 

      1. Paying Bills Late

      Similar to personal credit scores, your payment habits and history carry a substantial amount of weight for business credit scores. Paying late or missing payments can suggest to creditors that your business is financially irresponsible or that you lack sufficient cash flow to keep up with your obligations. 

      If you have past due accounts outstanding, prioritize getting those current as quickly as possible. Then work on establishing consistent payments going forward. You can do that by setting up notifications or alerts so you know when due dates are approaching or scheduling automatic bill payments. You might also consider negotiating different payment terms with vendors to better manage due dates. 

      2. Overusing Business Credit Cards

      A business credit card can be a convenient way to spend while also earning some of your purchases back in the form of rewards. But maxing out your cards could be a business credit mistake. 

      Credit utilization refers to how much of your available credit you’re using at any given time. The higher your credit usage, the riskier you may appear in a lender’s eyes. And while credit utilization isn’t as much of a factor in business credit scores as it is personal ones, it can still carry weight in score calculations. 

      If you’re carrying high balances on business credit cards, paying down some of what you owe can help. You may also consider requesting a credit limit increase, though that approach typically is only effective at reducing utilization if you don’t make new purchases against your higher credit line. 

      3. Not Controlling Employee Spending

      Giving employees access to a business credit card or charge card can be convenient, but there may be negative consequences for your credit if you’re not keeping an eye on things. If an employee charges a high balance on your business charge card, for instance, and you can’t pay the balance in full on time, then you risk having a late payment reported to the credit bureaus. 

      If you’re adding employees to business credit card or charge card accounts and those accounts offer spending controls, using them is a simple way to avoid this credit mistake. For example, you can set controls on how much can be charged to each card and where purchases can be made. That way, you’re protecting both your bottom line and your business credit. 

      4. Choosing the Wrong Loan or Loan Terms

      Loans can be useful if you need working capital in the short-term or you have a long-term growth goal to fund. The key is making sure that your financing terms are a good match for your business’s cash flow

      Specifically, you need to consider before borrowing what the monthly payment on a business loan will be and how long you’ll be paying it. If you have a seasonal business with sales that ebb and flow, for example, you’d want to make sure you could meet the monthly payment obligations for the loan consistently, even when cash flow thins out. 

      Not doing so could spell trouble if you struggle to keep up with your loan payments. Again, the biggest risk is that you could pay late or, worse, default on the loan altogether, hurting your business credit in the process. 

      5. Working with Vendors That Don’t Report Credit Activity

      Vendor credit or tradelines can be a helpful credit-building tool, especially for new business owners. While you might not have the operating history or revenue to qualify for a business loan, you may find it easier to get approved for lines of credit with your vendors. 

      The mistake happens when you open tradelines with vendors that don’t report your account activity to business credit reporting agencies. While this doesn’t hurt your business credit directly, it doesn’t help it either since you’re not getting credit for paying on time. 

      When researching vendors and vendor credit options, remember to ask whether they report to the business credit bureaus and which ones they work with. While you don’t have to skip working with vendors that don’t report, it’s good to have at least one or two that do. 

      6. Not Checking Your Business Credit Reports for Accuracy

      If you aren’t reviewing your business credit report regularly, you could be overlooking errors that might be hurting your business credit score. For example, a payment that’s reported as late when you paid on time is a seemingly small thing, but it could work against your score in a big way. 

      You can check your business credit reports through Dun & Bradstreet, Equifax, and Experian, though take note that there may be a fee involved. Once you have your reports, review them closely to make sure all of the information being reported is accurate and correct. 

      7. Not Using Business Credit at All

      It’s a mistake to assume that the best way to avoid credit mistakes is to simply not use it. Loans, credit cards, and lines of credit can be immensely helpful in running and scaling your business. When you don’t use any kind of credit at all, you have no opportunity to build business credit. The result is that when you’re in a situation where you do need to borrow, you may have a tougher time qualifying for financing. 

      If you’re wary of using credit for your business, start small and try out one credit option at a time. A business credit card, for example, is typically the easiest way to get started since you can qualify for a card based on the strength of your personal credit score and history. As you learn how to use your card responsibly, you can branch out to other credit options for your business. 

      About the author
      Rebecca Lake

      Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.

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