The Consequences Of A Bad Business Credit Score

Building up a strong reputation within the community and among clients is imperative for SMEs, but there’s something a lot of small business owners are missing to gain the confidence of some important people.

A new report from small business community site Manta says the majority of small business owners are clueless about their business credit scores, and all the confidence in your small business from neighbors won’t do any good when looking to secure a loan.

In a survey of nearly 3,000 small business owners, Manta uncovered what it dubbed “a major knowledge gap” about the business credit score and entrepreneurs’ understanding of the tool.

Nearly three-quarters (72 percent) of small businesses said they flat out don’t know what their business credit score is. The majority of companies in 41 out of 48 industries examined in the survey are unaware of their score, found Manta. Small restaurant businesses are some of the worst offenders, with a surprising 92 percent admitting they don’t know their scores — though companies in the legal services and beverages sectors are close behind.

But that knowledge gap extends beyond simply knowing where companies stand on the spectrum of business credit scores.

Manta noted that nearly 60 percent of respondents have no idea where they should look to find out their business credit scores. There is also a lack of knowledge regarding what to do with that information once they get it, researchers said.

Financial Impacts

Business credit scores are key indicators for lenders and are critical in helping companies access loans, lines of credit or commercial cards, explained Manta. The most common consequence of a poor credit score, researchers found, is getting turned down for a loan.

There are other reasons, though, companies should pay attention to their scores. Suppliers and vendors are likely to look up a company’s credit score before they extend lines of credit or payment terms, for instance. Scores can also help companies compete when looking to secure government contracts.

Having access to these instruments is also key to building up a good business credit score. But less than a third of the companies surveyed said they have business accounts tied to lines of credit, which are one of the most effective ways to build a business credit score. In breaking down that data by industry, Manta found that 88 percent of electrical SMEs don’t have a line of business credit, closely followed by agriculture businesses and insurance firms. Even the majority of industrial machinery small businesses don’t have access to this financial tool.

What To Do

There are a few ways businesses can build up their good credit, Manta said. The first, analysts offered, is to separate personal from business finances. While personal credit scores can also be key for young, unestablished small businesses to access key financial services, Manta noted that a business should spend only its own money, not the money of the small business owner, to ensure the financial success of both parties.

Small business owners must also establish business credit accounts, Manta argued, so companies can build their credit history. Obtaining a commercial card can be a first step in this path to ensure that small business owners have access to some kind of business line of credit.

Payment history is key to maintaining a good business credit score, as it’s the most heavily weighted factor when determining the score, Manta explained. This means companies should consistently pay their service providers and vendors early — 30 days at longest.

Finally, Manta suggests that small business owners frequently monitor their scores to ensure consistent performance.