How to rock your business’s bank credit score

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How to rock your business’s bank credit score

Published By Janet Gershen-Siegel at November 1, 2017

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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.

Bank Credit Scores Explained

A small business can obtain more business credit rapidly, 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 (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.

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 Rating Ranges

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)
  • High-4 –7,000-9,999
  • Mid-4 –$4,000-6,999
  • Low-4 –$1,000-3,999

Rocking Your Business’s Bank Credit Score

It should be clear that the thrust behind bank credit scores is to show proof that your small business can pay back its financial obligations in an expeditious manner. Therefore, yes, you will need to maintain a minimum balance for at least three months. Every cycle is based on the balance rating during the previous three month period.

It is also vital that the business owner ensures that their business bank accounts are reported exactly the same way all of their business records are, and with the exact same physical address (no post office box) and phone number.

It is imperative that each and every credit agency and trade credit vendor, every record keeper (of financial records, income tax, web addresses and e-mail addresses, directory assistance, etc.), also 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.

Plus the business must manage its bank account responsibly. This means that the small business should avoid writing non-sufficient funds (NSF) checks at all costs, because that decimates bank ratings. Non-sufficient-funds checks are something which no business can afford to let happen. It is even a good idea for the business to add overdraft protection to their bank account as soon as possible, in order to avoid NSFs.

Your business must show a positive cash flow. The cash coming in and leaving a 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. When an account shows a positive cash flow it indicates that the business is generating more revenue than is used to run the company. That means the bank will feel that the business can pay its bills.

Finally, understand that banks are highly motivated to lend to a business with consistent deposits. 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.

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