Have you ever wondered why your business credit score is the way it is? If you’re like most business owners, you click a button that produces a three-digit number.
What happens in between those steps may seem like a mystery.
Your business credit utilization ratio (or rate) plays an important role in the math that these scoring agencies crunch. Knowing what it is can help you manage your finances in a way that makes your business look more trustworthy to lenders the next time you borrow.
What is a Credit Utilization Ratio?
Your utilization ratio compares how much credit you’ve used to the total amount of credit you have available. It only affects revolving accounts that allow you to withdraw funds on a continuous basis, provided you keep your account in good standing.
Your ratio shows as a percentage, so you can see how much of your limit you’re using out of 100. Where you fall on this scale tells the financial world how often you carry over a balance each month.
What is a Good Utilization Ratio?
Typically, 100% means you’ve aced the test, but in this particular scenario, it’s flipped.
Earning 100% means you’re maxing out your accounts and carrying over a balance. This may suggest your budget is off kilter as you’re struggling to pay off what you’ve charged to these accounts.
The lower you go, the more in control your business looks. A ratio of 10% or less suggests you rarely need to rely on these accounts, and when you do, you pay off most of your balance.
It’s a Personal and Business Metric
Utilization ratios factor into both your personal and business scores. But only your personal line of credit’s ratio will affect your personal score, and only your business accounts will affect your professional score.
For example, a personal line of credit through MoneyKey & CC Flow may report your activity to the biggest scoring agencies for your personal file. But this account will not show up in your business report, nor does a financial institution like MoneyKey recommend you use this line of credit for professional expenses.
Remember this as you focus on improving your ratio. If you want to affect your business credit, stick with your professional line.
How Do You Improve This Ratio?
Improving your utilization is all about paying off your balance. This means you’ll have to make a concerted effort not just to pay your bills on time, but to make more than the minimum payment.
Like a personal line of credit, your business account has a minimum payment option. It’s the lowest amount of money you can pay while keeping your account in good standing.
It comes in handy when cash is tight, but you shouldn’t rely on it when you have the cash to spare.
The minimum payment doesn’t won’t make headway against your debt, so your purchases will tie up your limit for longer. You’ll also have to pay interest or finance charges on any outstanding balance.
As a small business owner, a line of credit is an invaluable tool. You can dip into these funds to help you cover big purchases and essential repairs when operating cash flow is lean.
Just be careful how much you charge to these accounts, making sure you have a plan to pay them off as quickly as possible. Managing your utilization this way may help you improve your business’ credit score.
The post Business Credit Utilization 101: Understanding the Basics appeared first on SiteProNews.
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