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Covering entrepreneurship and business start up questions for non-residents and US citizens.

 

Feb 01 2016

Are You Putting Your U.S. Business’s Credit Rating at Risk?

by John Gordon | 15:02 GMT

Credit is necessary for the operation of any business. Businesses need credit for a variety of purposes. Suppliers sell goods on credit. Credit is needed to take loans for large purchases like real estate, heavy equipment, vehicles, and manufacturing equipment. Revolving credit is used to manage business operation expenses and cover payroll. Credit doesn’t just refer to purchases. Many businesses rely on leases to obtain office or operating space, office equipment, and vehicles. Without a solid credit rating and good credit practices, your business may lose credit standing. It will not be able to borrow and will eventually fail. Without realizing it, your regular business practice may be putting your credit at risk. Here are some strategies to make sure that your U.S. business is maintaining the best credit rating possible.

Credit is rated in two general ways: commercial credit rating services, and empirical formulas used by accountants.

Maintaining a Strong Commercial Credit Rating

Companies like Dun & Bradstreet and Experian provide third parties with a “credit rating” for a potential borrower. These services look primarily at consumer-like credit and public records to determine the rating. There are a number of ways to harm this rating:

  • Not paying credit card bills on time, or defaulting on payments. Credit card companies report these types of delinquencies, and they are a red flag to potential lenders. Sometimes, in a crunch, a business manager can take risks and slide on credit card payments a couple of times a year, or float the payment (paying after the due date) and absorbing the late fees. This is a short term fix that will cause a long term problem. Keep up with, at least, your minimum payments on credit cards and other regular debt payments.
  • Allowing a court judgment to be entered against the business. Judgments are public records and instantly get spotted by credit rating agencies. A business owner may think it is safe to allow a judgment to be entered against a corporation because he, as a shareholder, is immune from the judgment. Perhaps. But organization that has to evaluate whether to do business with your company will see the judgment. The potential lender will see your business as one that does not care about its obligations, harming your chances of getting credit. Judgments aren’t just money judgments. Evictions, foreclosures,and repossession of equipment are also judgments that appear in the public records and will harm your credit rating.

Maintaining Good Credit For the Accountants.

Credit rating agencies are most often used by credit card companies, leasing companies, and other smaller lenders to evaluate your creditworthiness. But lenders for larger purposes like real estate, equity lines, and heavy equipment will want to see full financial statements. These are prepared by your accountant. But what they say is determined by how you run your business every day.

  • Keep accurate records every day. Let’s be honest, you got into business to run your business. Keeping financial records takes away time from making profits. But this is a necessary process. Keep and enter payments, receipts, and expenses as they occur. Keep all statements, payment receipts, and documents. Your accountant will have a hard time maintaining clear financial statements if she cannot account for every dollar in and out of your business. Lenders are reluctant to lend money to a business that cannot keep its finances straight. They see the management as irresponsible or hiding something negative.
  • Maintain positive debt-to-equity and debt-to-income ratios. What does all this mean? Debt-to-equity means how much debt the business has versus assets. In other words, does the business own enough assets with sufficient value to cover all debt? Ideally, a business should have more assets than debt. This will give lenders confidence that the business can pay off debts even in an emergency. Cash is cheap. Interest rates are low. Many business owners instinctively take out as many loans as possible to use that money to earn more profit. But this can lead to instability. Without an equity cushion (more assets than debt) banks will not advance more money. Their loans would be, essentially, unsecured.
  • Debt-to-income refers to the ability of the business to make payments on its debt. If monthly income exceeds monthly payments, the business will start bleeding money. When a business is losing money, banks and lenders consider it a bad credit risk. To avoid this problem, make sure loan payments are structured in a way that they fit your regular income.

Maintaining good credit standing with your business is essential for its success. Following these strategies, you will be on the way to a profitable and respected business.

John Gordon John Gordon

Founder, President & CEO of USA Corporate Services Inc., a New York City-based incorporation and company management firm. He is a graduate of the Global Executive MBA program from Columbia Business School and London Business School.

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