What Happens To Business Credit Score When Paying NET 30 Late
Paying a Net 30 invoice late can negatively affect your business credit score.
In net 30 terms, the supplier or creditor gives the buyer 30 days to pay the invoice in full. If the buyer pays within that time frame, the supplier often reports the prompt payment to the business credit bureaus, which can help to boost the buyer’s credit score. One of a few quintessential steps for building business credit. On the other hand, late payments can be reported as well and will typically hurt the buyer’s credit score.
Imagine your business credit score as an extremely sensitive opera singer. Each punctual payment is like applause at the end of a flawless performance, and it sings, basking in the glow of your credit score climbing the charts. But, make a late payment? That’s akin to hitting a sour note during the grand finale. It’s more than just a simple off-key slip—it echoes around the auditorium, causing your business credit score to wince and retreat backstage.
Here are some potential effects of late payment on your business credit score:
Lower Credit Score
Just like with personal credit, paying invoices late can lead to a lower business credit score. This can make it more difficult to secure financing in the future, and it may also impact the terms you can get from suppliers and lenders.
In a survey from our applicants, it can take up to six months for your company’s PayDex score to recover. Don’t let one late payment affect your company’s ability to secure funding.
Negative Payment History
Your payment history makes up a significant portion of your business credit score. Late payments can create a negative payment history, which may scare off potential lenders or suppliers.
The PayDex Score operates on a scale of 1-100. The model analyzes a business’s payment performance (i.e., if your business pays bills on time), and payment history is the most important factor in the score. A score above 80 reflects a near-perfect payment history.
Paying your Net 30 invoices on time produces a PayDex score of 80. Paying early exceeds the 80 PayDex score.
Increased Interest Rates
If your business credit score decreases, you may face higher interest rates when you seek financing. This is because lenders may view you as a greater risk.
Let’s take ABC Bakery, a small, family-owned business that is looking to expand and open a second location. The owners decide to secure a loan to finance this expansion. Now, suppose ABC Bakery has been a bit late on a few supplier payments recently, which led to a decrease in their business credit score.
Before their credit score dropped, they could have qualified for a loan at an interest rate of 5% per annum. But, due to the decline in their score, lenders now perceive them as a riskier investment and have increased the interest rate to 7%.
Let’s look at the real-world impact this would have on the loan. If ABC Bakery wanted to borrow $100,000 for the expansion:
- At the original 5% interest rate, ABC Bakery would have paid $5,000 in interest over one year.
- With the new interest rate of 7%, they would now be paying $7,000 in interest over one year.
That’s an extra $2,000 per year just in interest payments due to the decreased credit score and higher interest rate, without considering any compounding that would occur in a real loan scenario. This substantial increase in borrowing costs could significantly affect their profit margins and the business’s overall financial health. Therefore, maintaining a good business credit score is not just a good idea—it’s dough-lightfully important.
Damage to Business Relationships
Late payments can strain relationships with suppliers and lenders, which could have long-term effects on your business.
Legal Actions
In worst-case scenarios, consistent late payments might result in legal action from the creditor, which could further damage your business’s credit and reputation.
If a creditor sues your company and wins a lawsuit, you will owe the debt, legal fees, and court costs.
To avoid these issues, it’s crucial to manage your cash flow effectively and ensure that all invoices are paid on time. If you anticipate a late payment, it’s generally a good idea to proactively communicate with the supplier or lender to discuss the situation and possible solutions.
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