What Is Credit Utilization Ratio and How Does It Affect Your Business?
What’s your business’s credit utilization ratio? Even if you know your business’s credit score, you might be unfamiliar with its credit utilization ratio. Nonetheless, if your business uses credit, it has a credit utilization ratio. It’s a credit-based financial metric that provides insight into how much credit your business uses. What is credit utilization ratio exactly, and how does it affect your business?
Credit Utilization Ratio Explained
Credit utilization ratio represents the amount of credit your business is using relative to your business’s total available credit. It’s expressed as a percentage. A credit utilization ratio of 25% means your business is using one-quarter of its total available credit. If your business has $100,000 in total available credit — credit cards, lines of credit or other revolving credit accounts — and your business is currently using $25,000 on that available credit, its credit utilization ratio will be 25%.
How Credit Utilization Ratio Affects Your Business
Lenders may consider your business’s credit utilization ratio when determining its candidacy for a loan. A high credit utilization ratio can make it difficult to get approved for a business loan. A low credit utilization ratio, on the other hand, can increase your chances of getting approved for a business loan.
If your business’s credit utilization ratio is too high, you may have trouble paying for expenses. A high credit utilization ratio means less available credit to use. You can always use cash or other payment methods to cover the cost of expenses, but you may not be able to use credit.
Ways to Improve Your Business’s Credit Utilization Ratio
You can improve your business’s credit utilization ratio by using less credit. And when you do use credit to pay for goods or services, be sure to pay it off in a timely manner. Credit utilization ratio is based on revolving credit accounts. By paying down those revolving credit accounts, you’ll free up your business’s total available credit, thereby improving your business’s credit utilization ratio.
Another way to improve your business’s credit utilization ratio is to obtain but not use more credit. As your business’s total available credit increases, so will your business’s credit utilization ratio. Just remember not to use all of this credit. Credit utilization ratio represents the amount of credit your business is using relative to its total available credit. You can improve this metric by increasing your business’s total available credit and decreasing your business’s used credit.
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