For many entrepreneurs, running a small business is more stressful than raising kids — and there’s little else more stressful than managing your business finances.
For small business owner-operators — particularly those managing a fleet of one or more vehicles — building and maintaining good credit is critical. Banks and other financial institutions reserve the best lending terms for those with strong credit scores, and so bad credit can limit your ability to start or grow a business, if you can get a loan at all.
For existing businesses, a lack of credit doesn’t just impact your business behind the scenes. A strain on your financial resources can make it tough to deliver on the promises you’ve already made to your customers.
Further, because business operations are often tightly linked, a deficiency in one area can create a ripple effect, particularly if you’re running your own shop, or if you have a small fleet of vehicles operating on tight schedules.
Here are five unexpected ways bad business credit can affect the rest of your business.
1. Bad credit can increase your insurance premiums
Most people know that lenders, credit card companies and other financial institutions determine your interest rates for various financial products based largely on your credit score. Not only that, lenders are stricter with payment terms and timelines when a business has less-than-stellar credit. But many business owners may not realize that other types of institutions, including a variety of insurance providers, determine insurance rates at least partially based on credit score. Depending on the size of your fleet, those rate increases can add up quickly.
2. Bad credit can limit your vendor and supplier universe
Most large vendors and suppliers rely on traditional credit reports to gauge their willingness to work with you. Not surprisingly, there are still plenty of businesses that rely on less formal means to make such important business decisions.
Unfortunately, working outside of the traditional credit and financial system carries additional risk; that’s why the credit rating system was created in the first place. If your credit score is low, it may force you into relationships with riskier or more unreliable vendors and suppliers, many of whom may themselves have unfavorable credit profiles, uncertain futures and potentially higher interest rates.
3. Bad credit can harm personal relationships
When you’re a small business operator, relationships are everything. You know your employees, suppliers and customers by name, and you probably know their families, too. If your bad credit slows delivery times, it can negatively impact their businesses and livelihoods, and thus their families’ wellbeing. Say your employees depend on that annual holiday bonus. If you hit a snag with your business credit and can’t deliver an annual bonus, it can hurt your credibility and your reputation as an employer.
4. Bad credit can impact your operational efficiency
When it comes to delivery fleet management, anything that keeps your fleet off the road can quickly drain your resources. When one of your vehicles is in the shop (or worse, if it’s taken off the road due to safety concerns), it’s more challenging to optimize your routing. That, in turn, can lead to fuel waste, slower delivery times and other inefficiencies.
5. Bad credit hurts your ability to adapt — and grow
Since bad credit affects your payment terms with various suppliers, it can restrict cash flow and, in turn, your ability to adapt to the unexpected. That could include anything from an unexpected fleet maintenance cost, employee turnover or fuel cost increase. With available cash diverted to addressing any of the above issues, it becomes harder to pay your vendors and suppliers. In turn, you may struggle to maintain inventory and, most importantly, to grow.
The benefits of addressing credit problems head-on
Credit should never get swept under the rug; ignoring it only increases its impacts. In the end, any of these unintended consequences of credit issues can multiply when combined. Slower delivery times can lead to a decline in your customer experience, which can lead to shrinking revenue, tightening of margins, or even eventual bankruptcy.
It’s important to check your credit from time to time to stay abreast of changes in your credit score. Where consumer credit agencies are required by law to give free reports, you can get access to your full report from the three major business credit rating agencies — Dun & Bradstreet, Equifax and Experian — for a small fee.
If you struggle, or have struggled, with bad credit, there’s still hope. Credit is a long game, so anyone devoted to improving their credit has access to the tools needed to do so. A fuel card can help a company with a small fleet of vehicles build up credit, improve cashflow and manage expenses. You can also seek out vendors who report payments to business credit bureaus, and make sure to pay those vendors early.
Finally, remember that you’re not alone. Most small businesses and individuals alike have been in the same boat and survived to rebuild their credit, their businesses and their futures.