Most business owners don’t end up with bad credit because of poor intentions, as they end up there because of a liquidity crunch.
One late payment leads to higher interest rates, which leads to tighter cash flow. This then results in more missed payments that can destroy your business. To break the cycle, you have to stop reacting to the crisis and start rebuilding the foundation before it’s too late.
This guide will help you if you’ve got a struggling business due to bad credit, as we give you advice on how you can successfully break the cycle to avoid bankruptcy.
Continue reading to learn more about breaking bad credit cycle
Perform a Credit Audit
You cannot fix what you haven’t measured, so you should take a closer look at your credit by conducting a credit audit. Most owners are surprised to find that their business credit report contains errors that could have been easily prevented, as well as give you insight into what you can do next time to avoid credit issues.
Balances you’ve already cleared that still appear as active liabilities can falsely inflate your debt-to-income ratio and make you look bad to potential lenders.
Equally damaging are incorrect NAICS codes, as if your business is mislabeled under a high-risk category banks may automatically trigger higher interest rates regardless of your actual financial health.
Separate Personal and Business Finances
Sometimes it might not be your business credit that is bad, but rather your personal credit which means that you are doubling the chance of being in a terrible financial situation. Ensure your business is a legal entity by keeping your personal and business finances separate.
Stop using personal credit cards for business expenses and keep a business credit card instead, which allows you to keep proper tabs on your payments. This creates a firewall that protects your personal assets and allows your business to stand on its own two feet.
If you’re paying with your personal card for both your weekly food shopping and then your employee wages, it can get very confusing when it comes to keeping track of whether you’re profiting or not.
Trade References
When all your finances go through traditional banks, it might not report your on-time payments. Whereas, your suppliers might be able to do so if you ask them. You should take the time to identify vendors who report to credit bureaus and negotiate Net-30 terms.
This requires full payment of an invoice within 30 calendar days of the invoice date, serving as a form of short-term trade credit commonly used in B2B transactions.
This structure helps build buyer-supplier trust and often includes incentives like early payment discounts. When invoices are paid 10 days early, you create more positive payment experiences that can boost your score faster than a bank loan ever could.
Credit Insurance
The cycle of bad credit usually starts when a major customer fails to pay you, leaving you unable to pay your own bills. Credit Insurance acts as a safety net for your business, as if a customer misses a payment, the insurance company pays you instead so you don’t have to worry about it hurting your operations.
This ensures you always have the liquidity to pay your own creditors on time, protecting your score from further damage.
Many lenders will actually increase your borrowing limit or lower your interest rates because the insurance policy de-risks your primary asset. This gives you access to the affordable capital you need to pay off high-interest bad credit debt.
Debt Restructuring
High-interest loans can damage your cash flow and leave you in a lot of debt that you can’t afford to pay back. This is why you see many businesses using loans as a last resort, as they attempt to keep their business afloat.
If you find yourself wanting to do this, you should look into debt consolidation or an SBA 7(a) loan if you have enough collateral to do so. This will move you to low-interest debt that can free up your cash flow, so you have more chance of paying it back.
While difficult with bad credit, if you can show a creditor that their alternative is bankruptcy, they are often willing to lower the interest rate to ensure they at least recover the principal.
other valuable tips from our business blog (new win):
Bad Business Deal: Factors That Can Shut Your Business Down
5 Tips for Choosing the Right Small Business Loan for Your Startup
Final Thoughts
When you are suffering from bad credit, you might think that there’s little hope left in your business. However, breaking the cycle of bad business credit can be helped with targeted steps like having better management for your finances or getting the right type of insurance.
There’s always a way back, so don’t quit and find your solution today!
Image Credit: bad business credit by envato.com
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