It’s extremely crucial to understand the credit health of your business to enhance its functionality. In fact! It’s one of the key ingredients to building and maintaining a successful venture.
If you think that a credit health check is only meant for drooping businesses then it’s high time to bust such myths. Whether it’s thriving or failing, conducting a business credit health check is of utmost importance. This will allow you to evaluate your financial side and get additional support if required.
Not only does it impacts your business dealings but the attitude of lenders and investors towards you. Lenders usually take the help of credit bureaus to obtain your credit score. Let’s understand the importance of a credit health check in detail.
1. To check possible credit mistakes
Credit bureaus monitor your financial health and store your credit information. But, sometimes a clerical error in the system or erroneous updates from your lenders can falter your credit details. This misreporting should be done away with as soon as possible.
There are times when we forget to update new information with authorities like when you change your address or the gas supplier but forget to cancel the old one. Such errors can reflect in your credit report and bring down its quality. However, these minor changes can be easily fixed provided you keep a regular check on your credit report details and maintain a no-defaulter status.
2. To examine your credit utilization ratio
The credit utilization ratio refers to the percentage that you are borrowing from your existing credit limit. This ratio is a key factor in your credit score evaluation which further allows the lenders to determine your repayment potential. Ideally, you should keep this ratio below 30% as it’s considered that a low ratio can increase your credit score.
A credit utilization ratio of above 30% or more shows that you have financial issues with your lenders. To counter this situation, you can try to lower the ratio in long term. A high credit ratio does not completely cut down your loan chances but be ready to face a high-interest rate.
3. To save yourself from fraud
If you keep a regular tab on your business credit report then it becomes easier to identify any potential fraud or identity theft and can seek immediate redressal for the same.
The first thing to do after you receive your credit report is to check for new accounts that you don’t recognize, credit applications that you don’t remember making, or any faulty detail available.
These can be a sign of fraudulent activity. Make sure to report these issues to the credit bureau at the earliest. A credit health check thus becomes essential to detect fraud that you otherwise have missed.
4. To protect your personal assets
Most financial institutions ask you to use your personal assets or personal credit score for applying to loan applications. This is done when your company credit score is too low or fails to comply with the lender’s expectations. But, this brings your personal assets at high risk.
If your business hits a loss or you are unable to repay the debt, then it will take a negative toll on your personal credit score. To avoid such circumstances you should keep your business credit score high and conduct a regular credit health checkup.