Credit is an essential factor in opening a business. It determines if the business owner can still borrow funds to grow their envisioned company. However, there are instances where businesses fail, and owners mismanage their finances, resulting in a bad credit standing or rating. But it is easy to spot if a company will soon experience a bad credit rating, and here are some early indications.
1. Paying Beyond Terms
If a business is paying beyond the due date for their credit card, it’s a bad sign. The problem is that most business owners do not understand their business needs, precisely their demands for funds that go beyond the agreed period. It can result in using credit lines without a keen understanding of its wisdom.
As a result, when the issuing credit card company sends its monthly statement, business owners forget to pay or pay late. It is not a good sign of financial management. It indicates that you suffer from cash flow problems, eventually leading to a bad credit rating.
2. Higher Debt-to-Credit Utilization
Debt-to-credit utilization is a vital ratio to calculate your business’s credit profile. It reveals your company’s creditworthiness by checking the amount of the outstanding balance of your credit lines.
A good credit score is 580 to 669. If your score exceeds this number, it is a good sign. The ratio is recognized to check whether your business can meet its financial obligations. Anything lower than this threshold will result in a bad credit rating.
3. Account in Collection
If a business is late in paying or fails to pay a bill, it will result in the account ending up in the collection. It is a bad sign if you have many reports in the group. When you have a high number of accounts in collections, you cannot manage your finances well. It is an indication of your business’s bad credit standing.
4. Excessive Debt Inquiries
Debt inquiries are another sign of bad credit. It can happen when a business has to apply for some financing, and perhaps the company needs to proceed with something before they can exchange the items they have for cash. It is a good sign if it is for a good purpose. However, it is a bad sign if it is for minor purchases.
5. Frequent Denials
The best way to avoid bad credit standing is to avoid getting a credit card. If your business has applied for a credit card and was rejected, it is terrible. It is a sign that your business is not that strong financially. It will be challenging to get a new loan or a credit line with lousy credit.
Benefits of Keeping a Good Credit Score
When it comes to credit scores, various factors determine them. It is often seen that business owners have difficulty keeping their credit scores up without a hitch. It is usually a chicken-and-egg situation, where they just don’t know what they are doing wrong.
Having a good credit score is beneficial not just to you but also to your business. It also gives a better reputation to your business every time you apply for loans. It is a good sign when it is easy to get new loans. It can also help you save money in the long run.
Financial management is a critical factor in your business’s success. Keeping up and growing your business is challenging if you cannot manage your business finances well. It is hard to control cash flow, especially when running a new business. Financial management is something that most business owners want to master, and it is something that you can learn.
Head Start Biz Solutions is one of the lead generation companies in the country. Our goal is to help our clients achieve their goals and provide them with the financial freedom they deserve. We hope to maintain a good credit rating with our clients through credit counseling services for their excellence. Book an appointment with us and learn more about creating a business plan today.