By Janet Gershen-Siegel, Entrepreneur
Bank credit is the full amount of borrowing capacity that a business can get solely from the banking system. It is a subset of business credit.
Business credit represents the full and complete amount of money which a business can get from creditors of all sorts. That means the banking system, but it also means credit card companies, credit unions, suppliers (under what’s called trade credit or vendor credit or trade lines), and leasing companies.
Here is a brief explanation of how this is all intertwined, and what you can do to make sure you maximize your bank credit.
How bank credit works
A business can get more business credit fast, if 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 setup 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, such as a "high-4," or balance of $7,000 to $9,999 will slow down the approval process and could even mean automatic rejection.
A bank credit rating is the average minimum balance a business maintains in a business bank account over a three-month-long period. 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 business’s main goal should always be to maintain a minimum low-5 bank rating for at least three months. That is, on average, a balance of $10,000. This is because, without at least a low-5 rating, the majority of banks will operate under the assumption that a business has little to no ability to repay a loan or a business line of credit.
Keep in mind, you will never actually see these rating numbers, but they manifest in practice as five mistakes business owners commonly make that damage their company's bank credit score and hurt its chances for funding.
1.) You aren’t reaching a minimum balance or keeping it long enough
The idea behind bank credit scores is to show proof that a business can pay back its financial obligations quickly. Therefore, a business 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, and $10,000 or more should be every entrepreneur’s goal.
2.) Your business isn’t consistent in its accounts, address, or phone number
It is imperative that a business owner makes sure their business bank accounts are reported exactly the same way all of their business records are. This means with the exact same physical address (no post office box) and phone number. Consistency is a necessity here.
It is imperative that each and every credit agency and trade credit vendor also lists the business name and address the exact same way. This includes every keeper of financial records, income and sales taxes, web addresses and e-mail addresses, directory assistance, etc.
No lender is going to stop to consider the myriad ways that a business might be listed, when they look into the business’ creditworthiness. Hence, if they are unable to find what they need easily, they will either deny an application or it won’t be reported to a business credit reporting agency such as Equifax or Dun & Bradstreet.
3.) Your business isn't demonstrating responsible account management
A business must manage its bank account responsibly. This means that the company should avoid writing non-sufficient funds (NSF) checks at all costs. That decimates bank ratings.
Because non-sufficient-funds checks are something which no business can afford to let happen, it a doubly good idea for the business to add overdraft protection to a business bank account as soon as possible. This is avoids NSFs as well as bank charges.
4.) Your business isn’t maintaining a positive cash flow
To have a good bank credit score, any business will have to show a positive cash flow. The monies coming into and leaving a company’s bank account should result in more funds coming in than leaving. This is 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. According to Investopedia, it “represents the cash a company can generate after required investment to maintain or expand its asset base. It is a measurement of a company's financial performance and health.”
When an account shows a positive cash flow it means that the business is generating more revenue than is used to run the company. And in turn, that means a bank will conclude that it can pay its bills and can pay back any loan.
5.) Your business isn’t making regular, consistent deposits
Finally, keep in mind that banks are highly motivated to lend to a business which has consistent deposits. A business owner must therefore make regular deposits in order to maintain a positive bank rating.
The business owner is going to have to make a lot of consistent deposits. And they have to be more than the withdrawals they are making, in order to have and maintain a good bank rating. If they can do these things, then the business will have a good bank credit score. And, in turn, a good bank credit score means a company is far more likely to get business loans.
