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Focus on finance: Small businesses’ credit profiles improving: Is yours?

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By Cathy Williamson

Question: As a small business owner it hasn’t been easy since the recession hit, but I can honestly say the situation forced me to really monitor my credit very closely. Has that been the norm with other small business owners?

Answer: Ask any small business owner who’s been trying to borrow expansion capital, obtain working capital or simply get a line of credit from a lender, and they’ll tell you it’s become far more difficult since the recession hit. However, a new study by Direct Capital Corporation suggests the tough times may have actually had a beneficial effect on small business owners in one way: Since the recession hit in 2008 and during the past few years of recovery, small business owners’ average credit profile actually improved in 45 out of 50 U.S. states.

Direct Capital Corporation, a nationwide lender to small businesses, reviewed credit data for more than 23,000 small businesses nationwide during the past 12 years. Where do small business owners have the strongest average credit profile? Nebraska topped the list, followed by Alaska, South Dakota, Indiana and Oklahoma.

The states where small businesses’ average credit profiles have declined in the past four years are Washington, D.C., which had the lowest average credit profile, followed by Rhode Island, New Mexico, Montana and Texas.

Direct Capital Vice President of Marketing Stephen Lankler said one reason for the surprising change is business owners have a heightened awareness of how important it is to keep their credit score high.

“Business owners today are much more aware of how important it is to maintain a strong credit profile,” he said. “That was not the case five to seven years ago when it was much easier for a business to access credit.”

Lankler said growth in the number of products that give businesses on-demand access to their credit profiles also has contributed to the higher credit scores.

“As a result of the financial crisis, major lenders – including banks – have become much more restrictive in extending credit to business owners,” Lankler said. “In response, business owners have become more vigilant in maintaining strong credit profiles and a flood of products have been introduced to help them do so.”

What are some ways you can keep your business’s credit score high?

n Pay your bills on time and if you cannot, talk to the vendor to work out a payment plan.

n Monitor your business’s credit report to note any errors and take steps to correct them.

n Don’t mix personal and business money. Use business, not personal, accounts for business purchases.

n Use business credit cards carefully, being sure not to over-utilize credit. Ideally, pay off your balance in full each month, but if you can’t, keep your balance at less than 30 percent of your available credit.

n Even if you never plan to use it, make sure you keep enough available credit, through business credit cards and other options, to get you through an emergency if need be.

Cathy Williamson is manager of the Lincoln Trail Area branch of the Better Business Bureau. Contact her at (270) 982-1289 or cwilliamson@bbbkyin.org.