You never know when you’ll need access to business credit. You have a slow revenue month, a supplier increases their prices, or a piece of equipment needs immediate replacement. All of these scenarios can create financial pressure you didn’t see coming. If your credit is maxed out, you have limited flexibility to fill in the gaps, and this can be a red flag to lenders who want to see that you can manage credit responsibly.
Here’s what you need to know about business credit utilization: what it is, why keeping it low works in your favor, and how to manage it effectively.
What is credit utilization?
Your credit utilization ratio is the amount of total available credit that your business is currently using. It applies to revolving credit accounts only, such as credit cards and lines of credit.
Your credit utilization has a direct effect on cash flow and financial flexibility because it influences both your access to financing and your cost of borrowing. Lenders treat it as a signal for how reliant your business is on credit and whether you have room to take on more.
Aiming to keep your credit utilization below 30% is a widely accepted benchmark.
How to calculate credit utilization
To calculate your business credit utilization ratio, you can use this simple formula:
Credit utilization ratio = (Total credit used / Total credit available) x 100
For example:
If your business has $50,000 in available credit, and it’s using $15,000, then:
($15,000 / $50,000) x 100 = 30%
You have a credit utilization ratio of 30%.
If your business has $50,000 in available credit, and it’s using $10,000, then:
($10,000 / $50,000) x 100 = 20%
You have a credit utilization ratio of 20%.
Reasons to keep your credit utilization low
It affects your business credit score
Credit utilization is one of the factors used to calculate your business credit score. A lower credit utilization score can have a positive impact on your credit score because it shows lenders that your business can use credit responsibly and not overextend itself.
It opens up more lending options
A lower credit score can improve your chances of getting approved for a new loan, a low-interest business credit card, or a line of credit. It can also help you secure lower interest rates, higher credit limits, and more flexible lending terms for future financing.
It improves access to cash flow
Low credit utilization can help increase your access to cash flow when you have a low revenue month or have to pay for an unexpected expense. When you have more available credit, you can generally respond to cash flow issues faster.
How to keep your business credit utilization low
It’s clear that a lower credit utilization is beneficial, so what can you do to keep it low?
Pay your balance multiple times per month
Instead of waiting until the end of the month to pay your full balance, make frequent payments throughout the month. This prevents your balance from building up and can lower your utilization ratio.
Request a higher credit limit
If you increase your total business credit limit but your spending stays the same, this can result in a lower utilization ratio. For example, with $50,000 in available credit and $20,000 in use, the credit utilization ratio is 40%. If you increase available credit to $70,000 while maintaining steady spending, your ratio falls to approximately 29%, just under the recommended threshold.
Keep unused accounts open
Even if you’re not using one of your credit accounts, consider keeping it open. Closing a credit card or a line of credit can reduce the total available business credit, which increases credit utilization.
Monitor your credit utilization
Tracking your credit balances and available limits across business accounts can help you pay them off before your credit utilization gets too high. Some credit cards, like CIBC’s bizline Visa Card, offer control features like setting spending limits on purchases and cash advances on up to nine additional cards. You can also set up automatic payments to ensure you never miss a payment.
Maintain financial flexibility
Your business credit utilization is an important driver of cash flow and financial flexibility. If you can maintain a low utilization ratio, this sends a positive message to lenders, expanding borrowing options and ensuring you have a cushion available when cash flow tightens.
Making more frequent payments, requesting a higher credit limit, keeping unused accounts open, and regularly monitoring your balances are practical steps you can implement to maintain a low utilization and protect the financial flexibility of your business.
