3 mistakes that will destroy your business credit

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If you have aspirations of building a large business credit portfolio, you need to have a SYSTEM in place to manage all that funding. A key part of the system is maintenance. Yes, it’s boring AF but also necessary. Just like a house will crumble if the foundation isn’t solid, so can your business credit portfolio if these types of cracks showing up in its foundation. But worry not my friend, I’ll give you some solutions to get ahead or resolve these issues.

Mistake #1 – Late payments

Imagine you were the lender and you don’t receive an agreed upon payment from a borrower that owes you thousands of dollars. A few days later, the payment arrives. The sweetness of charging a late fee doesn’t out weight the bitterness of the doubts of the borrower’s financial situation. As a lender, you start to think whether the borrower is financially distress and this is an early sign of a default. You start wondering if your entire principal balance is at risk. While the lenders that we deal with don’t think about their loan portfolios that emotionally, they have risk management tools in place to avoid further losses.

Consequences:

  1. Making late payments can result in late fees,
  2. increased interest rates
  3. decreased credit limits
  4. damage to your credit report

I’ve listed the above consequences from least severe to most severe. Here’s how to avoid this miscue:

Solution #1 – Late payments

set ALL your accounts on auto-pay.

The BEST solution is to set ALL your accounts on auto-pay. For revolving credit accounts, I recommend setting up an auto pay for the minimum payment. This will act as a cheap insurance policy against late payments.

If you’ve already missed a payment, go make the payment, then come back and read the rest of this. Now set all your accounts on auto pay (including the one you missed a payment on). Once that’s done it’s time to minimize the impact of the late payment. First action you want to take is to call the lender and find out what consequences you’ll face. Typically, the longer your account has been established, the less severe the consequences. Let the lender know it was an honest mistake and you’ve already set the account on auto-pay and it will never happen again. Then it’s a matter of working out a solution that’ll minimize the blow back for you. Be professional and respectful when dealing with the lender. Remember it’s nothing personal; they are just trying to protect their capital.

Mistake #2 – Exceeding your credit limit

Let’s say you have a $25,000 credit limit and you exceed it. Some lenders may not even allow this and your last transaction will get declined. Going over the credit limit when you are allowed to do so can result in:

Consequences:

  1. Increased interest rate
  2. decreased credit limit
  3. closed account
  4. damage to your personal/ business credit score

Here are some steps you can take to prevent the waiter from awkwardly whispering in your ear in front of your hot date:

Solution #2 – Exceeding your credit limit

never exceed 50% of your card’s limit.

The best and most obvious solution is to never exceed 50% of your card’s limit. If your limit is $25,000, pretend its only $12,500. Pay off your card when you get close to $12,500 balance. This will ensure that you never exceed your limit. Go into your online banking and set alerts if you have to. Most lenders offer this feature. Use it to your advantage. If you’re already over the limit. Immediately make a payment to bring down your balance to 99% of your limit. This will at least buy you some time to figure out how to pay it down even more. Call the lender and find out what the consequences you’ll be facing for exceeding your credit limit (if any). Let them know you’ve already resolved the issue and it won’t happen again. Then it’s a matter of working out a solution that’ll minimize the blow back for you. Be professional and respectful when dealing with the lender. Remember it’s nothing personal; they are just trying to protect their capital.

Mistake #3 – Using Personal credit Cards for Business

Business expenses can be multiple times larger than your household expenses. Before you try to capture that spend to earn miles on a personal credit card, you may want to strongly consider the consequences.

Consequences: Unbeknownst to you, the high leverage will destroy your FICO score. I’ve seen many new business owners fall victim to this. I wrote an entire case study on this. You can read it {here} Another consequence that isn’t immediately obvious is that your business is not building any credit on a stand-alone basis. Just like you have a credit profile, you business has a credit profile of its own and not establishing credit early enough could prevent you from getting funding later.

Solution #3 – Using Personal credit Cards for Business

use business credit cards that don’t report to your personal credit

The best solution is to use business credit cards that don’t report to your personal credit. This will keep the debt off your personal credit profile. An ounce of prevention is worth a pound of medicine. If you’ve already used personal credit cards for business debt, the best solution would be to pay off your personal cards as soon as possible and start using business cards. If you need our help to establish business credit cards, {click here}



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