Your credit score may be the last thing on your mind as you struggle to keep your business afloat during this crisis. While that is completely understandable, maintaining a good credit score can be instrumental in your business’ ability to recover when the economy improves.
When looking at significantly reduced revenue and expenses that seem the same as always, it can be overwhelming to come up with strategies to ensure that all bills and debts are paid on time. However, meeting these financial obligations is crucial to maintaining a good credit score and good relationships with your financial institutions, lenders, and vendors.
This article takes a look at business credit basics and provides concrete tactics for how you can maintain a good business credit score during these lean times.
Business Credit Basics
Like personal credit, your business credit score affects ability to access loans, credit cards, lines of credit and other resources you need to sustain your business. Your business credit score can also affect the amount of credit or loans you are eligible for and the terms of those loans or credit.
Landlords, vendors, insurers and others may look at your credit score to determine whether or not they want to do business with you. For example, if your credit score is low, some vendors may require you to pay cash on delivery, rather than allowing you to create an account that can be paid monthly.
Knowing and keeping track of your credit score is an important aspect of your business. Being aware of your score can avoid unpleasant surprises when you seek loans or other financial support.
There are 3 major credit reporting companies in the United States: Experian, Equifax and TransUnion. You can obtain a free credit report every 12 months. Each credit bureau uses its own scoring system; however, scores typically range from 1 to 100, with a higher score meaning better credit.
During an economic downturn or crisis, some lending institutions may tighten their loan criteria or make the terms more stringent. Having a good credit score going into a crisis can protect you from bearing the brunt of such policies.
Tactics for Protecting your Business Credit Score during COVID
Know your score
Obtaining a copy of your credit report is a great step to take at the start of or during a crisis. If you notice any errors or omissions that are negatively impacting your score, follow up with the credit reporting agency immediately. If you are struggling to make minimum payments on time, you can add a brief statement to your credit report explaining your situation. For example, the statement can say “Negative information on my credit report is due to the current COVID-19 crisis.” In general, this statement should be no more than 100 words in length.
Explore alternative revenue streams
Ensure that you are aware of and have applied for every government crisis relief program for which you are eligible. You may be able to access grants, interest-free or low-interest loans, paycheck assistance to cover employee payroll and other supports. While many government assistance programs will soon expire, there may still be help available. You can obtain information about programs that are available to you by contacting the Treasury Board or the Small Business Association.
Some business owners are getting creative and using crowd-sourced funding platforms and virtual or physically distant fundraisers to sustain their business. Thinking outside the box can be instrumental in ensuring you have enough money coming in to pay the essential bills on time.
Once you have confirmed what your new revenue is from sources including any ongoing business, government grants, public or private loans, fundraising or gifts, you will definitely need to revise your budget to weather this economic crisis. Your projected revenues and expenses are going to change.
Go through your monthly expenses and determine if anything can be cancelled or suspended. For example, you may not need water delivery while all or most of your employees are working from home. You may have office supplies on standing order that are no longer needed that frequently or at all. Once you have reduced your expenses as much as possible, check this against your new revenue to determine if it is enough to cover at least minimum payments on essential accounts. If your budget forecasts that you will fall short of required expenses, then you will need to either revisit what is “required” or drum up additional revenue.
Pay on Time
Once you have explored and shored up all revenue streams and reduced your expenses as much as possible, prioritize making payments on time. Some accounts may have a minimum payment.
While this may seem counterintuitive to some, it is better for your credit score to pay this minimum on time than the full amount late.
Contact your financial institution if you are struggling to make payments on time. Many financial institutions have created COVID-19 relief programs that can help you to avoid falling behind on your payments and damaging your credit score.
Proactive communication with the vendors, service providers, utility providers and institutions that you pay will go a long way in not only maintaining your business relationships, but in maintaining your credit score. Contact those to whom you owe money as soon as you know you will not be able to pay on time. Especially during these challenging times, they may be able to make arrangements with you, such as allowing you to pay in installments or adjusting bill due dates if you are waiting for grant or loan payments. If the adjusted bill due date is paid on time, this should not impact your credit score.
When the economy improves, paying back any crisis loans you accessed on time can improve your credit score. Maintaining a good credit score, and the resultant positive relationship with vendors, landlords, account holders, and lending institutions will ensure that your business is well placed to take advantage of economic opportunities arising in the post-pandemic recovery era.