Credit Course 101 - Master your scores
The Battle Horse Credit Course
Maximize Your Credit to Grow Your Business
Welcome to the Credit Course, where you’ll learn to master one of most powerful tools to accelerate the growth of your business – the responsible use of credit.
Credit allows you to invest in your company today in a way that will result in greater results in the future – all without having to drain your cash reserves. That means that the more credit capacity you have, the more leverage you possess to impact your growth and profitability. Unfortunately, many business owners don’t understand how the small decisions they are making today are undermining where this tool can take them in the future.
This course is going to give you a greater understanding of the elements that are impacting your ability to get credit and equip you with practical tools to boost your creditworthiness today and in the future. Let's get started.
Credit 101: Master Your Scores
One of the primary, and most well-known, components impacting your credit is your credit score. These are numerical scores that combine data like available credit, credit usage, and payment history in an attempt to quantify your creditworthiness. They were developed to help lenders quickly weigh risk before awarding credit to their customers.
Credit scores are often a frustrating reality for many business owners because of the inability of a numerical score to tell the complete story of the factors affecting a company’s credit history. Entrepreneurs often feel misrepresented and unfairly constrained when applying for the capital they need to grow. Far too often, they are even more limited by a lack of understanding of what makes up the scores and how they can intentionally improve them.
There’s good news – learning more about how scores work leads to smarter decisions, and a savvy business leader can make their scores work for them over time.
Know the Different Types of Scores. Many business owners don’t understand the full spectrum of scores that lenders use to evaluate creditworthiness. These are grouped into two primary score categories – personal credit score and business credit score. A common mistake of hard-working, well-intentioned business owners is to prioritize the credit history of one category at the unknowing expense of the other. By recognizing the presence and composition of both scores, we can better steward each for the maximum benefit to our credit capacity.
Personal Credit Score. Most people are familiar with their personal credit score, known as a FICO score. This score reflects the credit behaviors in the personal life of an individual, separate from their business, including credit cards, mortgages, and auto loans. That’s why some business owners may be surprised to discover that their personal credit, and that of any other guarantors of the financing, have an outsized impact on their business creditworthiness. This score is calculated and reported by three primary credit bureaus: Equifax, Experian, and TransUnion. The scores reported by each bureau can vary from the others, and different lenders prefer different vendors, but the steps you take to improve your scores will have an impact across all bureaus.
Business Credit Score. In addition to your personal FICO score, your business has a score that reflects similar credit history data for your business entity. There is a greater variety of reporting bureaus for business credit scores, but PayNet is one that is commonly used. These business scores will report activities and behaviors on loans and leases held by the company, not the individual.
Establish Credit History. Once we recognize the presence of two different, yet vital, scores, we can start to intentionally manage our credit behaviors in each category to improve each score. As simple and obvious as it sounds, the first step is to establish credit history in both categories. This is especially important for sole proprietors and other small business owners who often run their businesses through their personal finances. This practice is problematic when applying for a business loan, because lenders will see no business credit history and a personal history that is more highly leveraged because of business expenses.
Practical step: Get a business credit card. A business card, even one with a low spending limit, can start to establish business credit history. Use it lightly without maxing it out and pay it off each month with disciplined consistency.
Practical step: Use responsible financing instead of cash. Even when you have the cash to make smaller equipment purchases, consider using financing to begin establishing a credit history.
Build Comparable Credit. A business credit history and decent scores will not guarantee approval for the next loan you seek. That’s because lenders look to see that you’ve responsibly managed loans of a similar size. Many aren’t comfortable with a customer that jumps from a $50k equipment debt to a $3M loan. This can be a challenge for young, capital-intensive businesses that rely on expensive equipment to fulfill their core product or service.
Practical step: Create a long-term strategy to scale your debt. Make a list of the equipment you’ll need to operate at the scale you’d like to be at in 5 years or some interval that makes sense for you. Create a loose schedule that spreads those purchases out over that period of time and generally arrange the purchases from smallest to largest. As you grow, try to follow the plan as closely as you can while responding to your immediate needs. Used equipment and equipment leasing can help cover needs until you’re ready to make the next purchase on your plan.
Limit Credit Inquiries. Many businesses will shop for the lowest interest rates by applying for credit with multiple institutions. That can give the appearance of seeking to take on more debt than you really are, and some of those inquiries can actually lower your credit scores. Working to find a marginally better rate can do more harm than good.
Practical step: Find a finance partner you trust and stick with them. Build a relationship with a lender that you trust will consistently get you competitive rates and work with them as much as possible. As their knowledge of your business grows, and your payment history with them deepens, they will likely be able to supply future capital with lower and lower interest costs to you.
Set Up Autopay. Many businesses are delicately balancing cashflow and prefer to have complete control over when money leaves their account, but it lowers your scores every time you exercise that option to hold your payment beyond its due date. Instead, set up an autopayment (or ACH) for your loans and leases. Not only will it ensure a perfect payment record, but some lenders may also offer incentives when they know that payment is guaranteed.
Proactive communicate with your lenders. When you’re experiencing challenges that could impact your ability to pay your bills, reach out to your lender in advance and talk through your challenges you’re facing. Many lenders would prefer to work with you to adjust your payment schedule rather than you missing a payment.
Create additional capacity. Among reflecting behaviors like your payment history, your credit score is a ratio of used credit to available credit. That’s called your utilization. That means that just because you have room on your credit cards or lines of credit doesn’t mean you should use all of it. If you are maxed out and your scores have been negatively affected, first work on consistently paying it down. Then you can work with your lender to increase your capacity over time, which will further accelerate the rehabilitation of your score.
Enhancing your creditworthiness by improving your credit scores is a marathon, not a sprint. Scores will fluctuate up and down regularly, but meaningful change will not happen overnight. Don’t get discouraged. Keep taking the right steps, be consistent, and you will see progress that can unlock the growth of your company.
Here’s more good news – you are more than your scores. In the upcoming installments of the Credit Course, we’re going to dive into a more complete picture of your credit.