Improving your business’ credit profile can save a lot of money in the long run. A good credit profile means you’ll pay less in interest costs and financial institutions will be more likely to lend money to you when you need it. A bad credit profile means the business may encounter issues accessing it, and at a rate where it is economically viable.
For this reason, you need to boost your credit profile. You can get business and personal credit profiles from Australia’s three Registered Credit Bodies (RCBs) – Dunn & Bradstreet, Experian and Equifax (Veda). The reports contain your credit history over several years, based on historical information from a variety of sources, such as payment and banking data from banks, company suppliers, self-reported data, media reports, legal actions and corporate financial reports. From that, the credit bodies give you a credit ‘score’.
Lenders can access this information as part of a credit check in deciding finance applications. Many start-ups or small businesses get finance applications knocked back because of bad credit scores. Below are a few tips on how to achieve a good score.
1. Pay on time
If you want a good business or personal credit score, then the single most important thing you can do is to pay loan repayments, suppliers and all your bills on time.
Dedicate resources, implement technology and new processes, set up direct debits, diary notes and other reminders of when payments are due to maintain or improve your credit profile. Information stays on credit profile for up to seven years, so over time you can build a good credit history and overdue debts on your profile history will fall away.
2. Manage your credit profile
More so than with your consumer credit, you can proactively manage your business credit profile by ensuring it always is complete and accurate. Ask each of the credit bodies for your credit profile and check the information contained in your credit report for accuracy. You can also supply updated information about your own business and payments to the credit agencies to help boost your profile.
3. Keeping your debts down
The level of debt your business has to fund its operations is important in determining your creditworthiness. If lenders see a lot of debt on your balance sheet, whether in absolute terms or relative to your competitors, they are less likely to extend you credit as you pose a greater risk of default, says Dun & Bradstreet.
Traditional lenders like to see about the same amount of debt as equity. This is shown as a debt-to-equity ratio of 1 to 1. If the business has twice as much debt as equity, the ratio is 2:1, and the lender will wonder whether the company can pay its interest bill. You can make your balance sheet stronger and improve your credit profile by paying down debt and improving that ratio.
4. Look after your personal rating
If you’re running a start-up business, your personal credit profile can impact your company’s creditworthiness. That’s because lenders will likely review your personal credit score in making a small business loan until your company develops a robust credit profile of its own.
Under the Privacy Act 1988, an overdue debt of at least $150 can be listed on your consumer credit report when it is overdue by 60 days or more. That information stays there even when you pay the debt off.
Keep in mind, that your business and personal ratings are separate and distinct – so both need to be monitored and maintained.
5. Invoice finance can help
It's important to understand that traditional financial services providers, in deciding whether to extend a small business finance, simply look at a business’s credit profile, which is based on historical information alone. As a result, many small businesses can and do get knocked back. This is where more innovative ways of lending come into their own, and Invoice Finance is a leading option.
Invoice finance may be a better and more cost effective option for your business. FactorONE is more flexible than many financiers because it looks at a business in a more holistic way than traditional financiers. Other than a credit history, FactorONE may take into account a business’s overall health, growth history and prospects and the quality of its customers or debtors.
FactorONE is able to approve most facilities within 24 hours of the initial application and first funding is typically available within five working days. For small businesses, invoice finance is an important option and a way of getting around a bad credit profile but also working towards a better credit profile to help it secure business finance into the future.
