Your Bank Rating – What’s it All About?
Did you know there are 7 ways you can wreck your bank credit? It is, unfortunately, pretty easy to run a chainsaw through your bank rating.
But before going any further, do you know the difference between bank credit and business credit?
Business credit is the money that your small business can get from all manner of creditors. That means credit card companies and suppliers, under what’s called trade credit or vendor credit or trade lines. That is, the vendor credit..
A bank rating, on the other hand, is a measure of the full amount of borrowing capacity which a small business can get from the banking system only.
Bank Ratings Explained
A small business can get more business credit quickly, so long as it has at least one bank reference and an average daily account balance of at least $10,000 for the most recent three month time period. This set up will yield a bank rating of a Low-5. So this means it is an Adjusted Debt Balance of from $5,000 to $30,000.
A lower rating, like a High-4, or balance of $7,000 to $9,999 will not automatically reject the small business’s loan application. However, it will slow down the approval process.
What is a Bank Rating?
A bank rating is a measure of the average minimum balance as maintained in a business bank account over a three month long period. Hence a $10,000 balance will rate as a Low-5, a $5,000 balance will rate as a Mid-4, and a $999 balance will rate as a High-3, etc.
A small business’s chief goal should always be to maintain a minimum Low-5 bank rating (or, an average $10,000 balance) for at least three months. This is because, without at least a Low-5 rating, the majority of banks will operate under the assumption that the business has little to no ability to repay a loan or a business line of credit.
But there is one thing to keep in mind – you will never actually see this number. The bank will just keep this number in its back pocket.
The Bank Rating Ranges
The numbers work out to the following ranges:
To get a High-5 rating, your business will need to have an account balance of $70,000 to $99,999. For a Mid-5 rating, your business must have an account balance of $40,000 to $69,999. And for a Low-5 rating, your business must hold onto an account balance of $10,000 to $39,000. So your small business needs this level bank score or better in order to get a bank loan.
For a High-4 rating, your business must have an account balance of $7,000 to $9,999. And for a Mid-4 rating, your business keep have an account balance of $4,000 to $6,999. So for a Low-4 rating, your business will need to have an account balance of $1,000 to $3,999.
Destroying Your Bank Rating
And now, without further ado, here are seven ways you can leave your bank rating in tatters.
7th Way to Destroy Your Bank Credit
Don’t maintain a minimum balance for at least three months. Since every bank rating cycle is based on the previous three months, a continually seesawing balance should damage your bank rating.
6th Way to Destroy Your Bank Credit
Don’t bother to assure that your business bank accounts are reported exactly the same way all of your business records are, and with the exact same physical address (no post office box) and phone number. Sow confusion in this area by changing one and not another, or not correcting an error if there is one.
5th Way to Destroy Your Bank Credit
To go along with #6, don’t make sure that each and every credit agency and trade credit vendor also lists the business name and address the exact same way. This is every keeper of financial records, income and sales taxes, web addresses and e-mail addresses, directory assistance, etc.
No lender is going to stop to consider the myriad ways that a business might be listed, when they look into the business’ creditworthiness. Hence if they are unable to find what they need easily, they will either deny an application or it won’t be reported to a business credit reporting agency such as Experian, Equifax or Dun & Bradstreet.
Therefore, if they are unable to find what they need easily, they will just deny the application. So make sure your records are a mess!
4th Way to Destroy Your Bank Credit
Never manage your bank account responsibly. This means that your small business should not avoid writing non-sufficient funds (NSF) checks at all costs, because those decimate bank ratings. Non-sufficient-funds checks are something which no business can afford to let happen.
Balancing checkbooks and accounts is so dull anyway. You’ve got enough money without even making sure, right?
3rd Way to Destroy Your Bank Credit
To add to #4, do not add overdraft protection to your bank account as soon as possible, in order to avoid NSFs. Why bother thinking ahead or planning for the future? Everything is going to be great forever, right?
Writing checks with insufficient funds (NSFs) is a sure way to ruin your bank rating.
2nd Way to Destroy Your Bank Credit
Don’t let your business show a positive cash flow. The cash coming in and leaving your company’s bank account should reflect a positive free cash flow.
A positive free cash flow is the amount of revenue left over after a company has paid all of its expenses. According to Investopedia, it “represents the cash a company can generate after required investment to maintain or expand its asset base. It is a measurement of a company’s financial performance and health.”
When an account shows a positive cash flow it indicates your business is generating more revenue than is used to run the company. That means the bank will feel your business can pay its bills.
So if you really want to wreck your bank rating, buy whatever is expensive for your business so your expenses outstrip your profits, too.
1st Way to Destroy Your Bank Credit
Banks are highly motivated to lend to a business with consistent deposits. And a business owner must also make regular deposits in order to maintain a positive bank rating. The business owner must make a lot of consistent deposits, more than the withdrawals they are making, in order to have and maintain a good bank rating. If they can do that, then they will have a good bank credit score.
Consistency is the hobgoblin of little minds, right? So be a free spirit!
Destroy Your Business’s Bank Rating – Even Though You Will Never See It
You, the business owner should never make consistent deposits. And these deposits should never be more than the withdrawals you are making, in order to destroy your bank credit.
If you can do these things, then your business will have a terrible bank credit score. And, in turn, a bad bank rating means your company is far less likely to get business loans.
Just Kidding: Of Course We Don’t Really Want You to Destroy Your Business’s Bank Rating
So, where do you go from here?
The First Great Way to Rescue Your Bank Rating
Perhaps the easiest way to attain and keep a good bank credit rating is to deposit at least $10,000 into your business bank account and keep it there for as much as a half a year. While you will still need to make consistent deposits, this one simple step will help in three ways. One, you will have kept a good minimum balance for at least three months. Two, you will most likely not overdraw with such a good balance. And three, you will be at the magic minimum for a Low-5 bank rating. Hence you will be taking care of our #4 and #7, above.
And you may even be able to get around our #3. But we still highly recommend overdraft protection.
The Second Great Way to Rescue Your Bank Rating
A second requirement is to make sure your business account details are consistent across the board, everywhere. While it may take some work in order to make sure everything is correct, you will be taking care of our #5 and #6, above.
The Third Great Way to Rescue Your Bank Rating
A third necessity is to make consistent deposits, and make sure they are more than the amounts you are withdrawing each month. This will take care of our #1 and #2 handily.
Your bank rating is not to be trifled with. Even though the banks maintain a mystery about them, failing to keep your bank rating high will make it a lot harder to succeed in business.