Build Your Company’s Creditworthiness
For many SMEs, bootstrapping seems to be an eternal state. In Nov 2016, an SME Development Survey which polled 2,513 local enterprises highlighted access to financing and cash flow problems are the foremost concerns. Higher bank interest rates, tighter access to supplier credit, defaulting customers, and Bad Loans were among the top concerns.
Most small business owners often find themselves at the mercy of traditional financial institutions. As a result, many small business owners lean on their personal finances to fund their business. Using a personal credit line affects the ability to qualify for a business loan since business credit does not take personal debts and obligations into consideration.
A strong credit history gives you access to multiple financing options when you need a working capital and helps with favourable interest rates. Here are some steps you should take to start building your business credit:
Separate Business and Personal Finances This is key to maximising your business credit since your personal credit cards do not contribute to your business credit although, many financial institutions take your personal credit rating into consideration whilst processing your business loan. Furthermore, when life throws curve balls at you, you would not want your personal situation to affect your business and vice versa.
In today’s lending environment, it is common practice to sign a personal guarantee on any kind of loan or credit of the business. Hence, if you are a shareholder in the company you should keep a close eye on your own credit rating.
Open a credit line Once you have a business account, it’s important to apply for credit even if you don’t need one. Most banks avoid giving loans to new companies. In some cases, they wait for a year or two before they consider your application. However, you might get access to a business credit card with a certain limit. Using it for regular business expenses is a good first step towards building a payment history.
Make timely payments This is a golden rule. Paying back your business credit balance in full every month is a good first step towards building up a history of prompt payments. On the flip side, failure or late payment is a sure way to hurt your record.
Paying your vendors on time is another area to focus on. Being a good client would set you off to a good start and in the long run help you extend your payment credit period as well.
Maintain a healthy cash flow As the old adage goes – cash is king. One of the top reasons for SMEs to cease operations is poor cash management. It is vital to ensure that you collect payments from clients on time and plan your projects well so that you always have the latitude to take on new projects and expand your business. We recently published an article with tips into maintaining a sustained cash flow. Click here to read more.
Finally, the most important thing to remember is that building your credit score takes time. So consistency plays an important role in your path to building a successful business.
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