What is My Business’ Credit Utilization Ratio?

Most small business owners are aware of the importance of business credit scores. For everything from obtaining business credit cards to bank loans, your business’ credit score is the starting point for lenders to determine what kind of rates and credit limits they’re willing to offer you.

But you may not be familiar with one of the most important factors for business credit scores. This figure, also known as debt to credit ratio, describes how much of your credit limit you use each month, and it’s used by financial providers as a major clue as to your business’s financial decision-making and reliability.

The Role of Credit Utilization Ratio in Business Creditworthiness

Your Credit Utilization Ratio plays a crucial role in determining your business’s creditworthiness. This ratio reflects your ability to responsibly manage credit at your disposal. A low credit utilization ratio is generally seen as a positive indicator of financial stability and responsible fiscal management, thus improving your business’s overall creditworthiness. Knowing how credit utilization works is key to obtaining an exemplary ratio.

Understanding Credit Utilization Ratio and Its Significance

Understanding the Credit Utilization Ratio is essential for businesses, as it measures the percentage of available credit you’re using. Maintaining a good credit utilization ratio is crucial because it’s an important factor in your business credit score. If you are able to build and maintain excellent business credit, you can reap numerous benefits, like obtaining easier financing at more favorable terms in the future.

Impact of Credit Utilization on Business Credit Scores

Credit Utilization Ratio has a significant impact on your business credit score. A low credit utilization ratio, where you use only a small percentage of their available credit, will positively influence your business credit scores. Conversely, a high credit utilization ratio, which means that a business regularly uses a large portion of their available credit, will negatively affect credit scores, suggesting potential financial strain and reducing the business’s creditworthiness in the eyes of lenders and creditors.

Calculating and Understanding Your Business Credit Utilization Ratio

Let’s break down how your business credit utilization ratio is calculated.

Determining Business Credit Utilization Ratio Formula

To determine your Business Credit Utilization Ratio, divide the total outstanding credit balance by the total credit limit available to your business, then multiply the result by 100 to get the percentage. This formula helps assess how much of the available credit your business is currently using and plays a critical role in evaluating your financial health.

Assessing Your Current Credit Utilization Ratio

To assess your current Credit Utilization Ratio, add up all your credit card debt and divide that sum by the total credit limit across all your credit cards. Multiply the result by 100 to obtain the percentage, which will indicate how much of your available credit you are currently utilizing. Monitoring and maintaining a low ratio is vital for a healthy credit score and financial stability.

Interpreting Credit Utilization Ratio Percentages

Generally speaking, lower Credit Utilization Ratio percentages (e.g., below 30%) are considered favorable, indicating responsible credit management and potentially boosting your credit score. Higher percentages (e.g., above 30%) may raise concerns among creditors, as they suggest a higher reliance on credit and could negatively impact your creditworthiness.

Identifying Optimal Credit Utilization Targets for Businesses

Most businesses should strive for a credit utilization ratio below 30%. This percentage is generally recommended as it reflects solid credit management, increasing its appeal to lenders and creditors. However, it’s important to not view 30% as a hard-and-fast rule.

You should also consider your individual financial circumstances, aiming to maintain the lowest credit utilization ratio feasible while meeting the business’s credit requirements and ability to manage debts effectively.

Strategies for Maintaining an Optimal Credit Utilization Ratio

Now, we’ll explore practical steps you can take to lower your credit utilization and improve your business credit score.

Paying Down Outstanding Balances Regularly

Consistently paying off your balances is crucial for maintaining a good credit utilization ratio, because it keeps the percentage of utilized credit low. By regularly reducing the amount owed on credit cards and loans, you can demonstrate responsible financial management and financial discipline to credit reporting agencies and potential lenders.

A lower credit utilization ratio positively impacts business credit scores, increasing your creditworthiness and making it easier to secure favorable financing terms when needed. Additionally, responsible credit utilization practices can lead to improved overall financial health and stability for your business.

Increasing Available Credit Limits

A credit limit increase can help to lower your credit utilization, by expanding the total credit available to the business. With a higher credit limit, the same outstanding balances would represent a lower percentage of overall credit utilization.

However, it’s essential to use your credit limit increase responsibly. Avoid accumulating more debt than your business can manage to maintain a healthy credit utilization ratio effectively.

Utilizing Multiple Credit Sources Wisely

Using multiple credit sources in a smart, responsible way is beneficial for maintaining a good credit utilization ratio. With an increased amount of available credit limit across different accounts, you can spread out credit usage responsibly. That helps keep overall credit utilization low, as it reduces the likelihood of maxing out or reaching the limit of on one specific card or line of credit.

Expanding Your Total Spending Limit with Revenued

The Revenued Business Card is an excellent option for businesses that have a limited credit history or a fair credit score. The card has a low barrier to entry when it comes to personal credit scores, making it an accessible option for small business owners who have less-than-good business credit scores or limited credit histories. 

Revenued does not require a hard credit inquiry, so there is no temporary dip in any personal credit score. Additionally, the card’s spending limit increases a business’s revenue, making it a great option for businesses that are seeing rapid growth and need access to more funding for their operations.

How to Apply for a Revenued Business Card

Applying for the Revenued Business Card is simple and takes only a few minutes. The whole application process can be done online on Revenued’s secure website. Approval can be done in as little as an hour, and the login information and funds are accessible after 24 hours.

The decision is based on a business’ revenue and cash flow, as opposed to a credit score, so no hard credit inquiry is required. This keeps any personal credit scores from dropping temporarily during the application process.

Eligibility Criteria and Application Process

To qualify for the Revenued Business Card, businesses must:

• Operate from within the United States
• Be in operation for 1 year or more (no start-ups)
• Must have a separate business account
• Have $20k/month in revenue deposited into their business bank account 
• No more than three negative days a month in bank balances
• Not be a sole prop

Using a Revenued Business Card to Manage and Grow Your Business

Using the Revenued Business Card is a great way to help manage and grow your business. With spending limits increasing as revenue grows, you can keep on top of payments and cash flow without worrying about going overboard on spending.

Even if your business credit score is not where you want it, or your business credit history is limited, the Revenued Business Card allocates you the funds you need, now, in order to grow your business and allow you to get started on turning your business credit history in a positive direction.

Impact of Credit Utilization on Business Credit Scores

Here’s how much Credit Utilization matters when it comes to determining your business credit score.

Understanding the Weight of Credit Utilization in Credit Scoring Models

A low credit utilization rate carries significant weight in credit scoring models, as it is a key indicator of a borrower’s credit management habits. High credit utilization ratios negatively impacts credit scores, while maintaining a credit utilization ratio below 30% is generally associated with better scores and enhanced creditworthiness.

Effects of High Credit Utilization on Creditworthiness

High credit utilization will have a seriously negative impact on creditworthiness as it indicates a heavy reliance on credit and potential financial strain. Lenders and creditors view businesses with high credit utilization ratios as higher risk borrowers, which leads to difficulties in obtaining new credit or loans, and may result in higher interest rates and less favorable credit terms.

Demonstrating Responsible Credit Management for Score Improvement

To demonstrate responsible credit management and improve scores, businesses should aim to keep their credit utilization ratio low, ideally below 30%. Timely payment of bills and debts is essential, as any missed or late payments can significantly impact scores. It’s also important to avoid maxing out credit cards and instead, use credit conservatively and strategically. Regularly monitoring credit reports for errors and fraudulent activities can help maintain accurate credit information and contribute to overall credit score improvement.

Managing Credit Utilization for Enhanced Financial Health

Implementing Budgeting and Expense Tracking Systems

Implementing budgeting and expense tracking systems can lead to better credit utilization by providing businesses with a clear understanding of their financial situation and available resources. By carefully managing spending and ensuring that credit is used only when necessary, businesses can maintain an ideal credit utilization ratio, positively impacting their scores and overall creditworthiness.

Negotiating Lower Interest Rates or Fees with Creditors

Negotiating lower interest rates or fees with creditors can be a strategic approach to managing credit utilization effectively. By securing more favorable terms, businesses can reduce the cost of borrowing and potentially free up more available credit, leading to a healthier credit utilization ratio and improved financial stability.

Questions and Answers

Is 10% or 30% credit utilization better?

A credit utilization ratio of 10% is better than 30% when it comes to demonstrating creditworthiness. A lower credit utilization ratio, such as 10%, indicates that a business is using only a small portion of its available credit, which is viewed positively by creditors and credit scoring models. On the other hand, a credit utilization ratio of 30% is considered reasonable and an ideal ratio, but it may not have as positive an impact on credit scores compared to a super lower ratio like 10%.

Is 50% credit utilization okay?

A credit utilization ratio of 50% is considered subpar. While it may not have a severely negative impact on scores, it is far from ideal for maintaining the best creditworthiness. While it is not as bad as having a credit utilization ratio close to or at the credit limit (100%), it still suggests a significant reliance on credit and could raise concerns among potential lenders and creditors. To improve scores and creditworthiness, it’s generally recommended to aim for a credit utilization ratio below 30%.

What is a bad credit utilization ratio?

A bad credit utilization ratio is generally considered to be one that exceeds 30%. Bear in mind that this figure is determined by calculating all of your outstanding balances on all your sources of credit – from any revolving credit accounts you hold to business lines of credit, business credit cards, and more.

When a business’s credit utilization ratio goes beyond this threshold, it may potentially signal financial stress or difficulty in managing debts. A credit utilization ratio above 30% can negatively impact credit scores and often lead to difficulties in obtaining new credit or loans. For excellent credit, you’ll need a ratio below 30%.