Published By Janet Gershen-Siegel at February 27, 2018
It is, unfortunately, pretty easy to wreck your bank credit.
Before going any further, do you know the difference between bank credit and business credit? Business credit is the full and complete amount of money that your small business can get from all manner of creditors. That means the banking system, credit unions, credit card companies, suppliers (under what’s called trade credit or vendor credit or trade lines), and leasing companies.
Bank credit, on the other hand, is the full amount of borrowing capacity which a small business can get from the banking system only. Hence it is essentially a smaller subset of business credit.
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 (which 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.
A bank credit rating is 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.
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 numbers work out to the following ranges:
· High-5 — account balance of $70,000–99,999
· Mid-5 — account balance of $40,000–69,999
· Low-5 — balance of $10,000–39,000 (your small business needs this level bank score or better)
· Mid-4 — $4,000–6,999
· Low-4 — $1,000–3,999
Here are seven ways you can leave your bank credit in tatters.
Don’t maintain a minimum balance for at least three months. Since every bank credit cycle is based on the previous three months, a continually seesawing balance should damage 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.
To go along with #6, don’t make sure that every credit agency and trade credit vendor, every record keeper (of financial records, income tax, web addresses and e-mail addresses, directory assistance, etc.), lists the business name and address the exact same way. No lender is going to stop to consider all of the ways that a business might be listed, when they look into the business’ creditworthiness. 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!
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?
To add to #4, don’t 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?
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 your company has paid all of its expenses. 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 credit, buy whatever’s expensive for your business so your expenses outstrip your profits. Doesn’t every factory deserve plush carpeting in the loading dock?
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? Ralph Waldo Emerson said that, and he said it over 100 years ago so that’s got to be the best way to handle your company’s bank deposits, right?
Yes, you can wreck your bank credit these seven ways. So don’t! Because if you wreck your bank credit, you’ll also tank your business. And no one, not even the ghost of Ralph Waldo Emerson, wants to see that happy.