A good credit score is essential if you want to secure the most competitive business loan interest rate. But it’s not something that happens overnight; solid credit takes time to build and it’s never too early to start, even if you’re not yet in the market for business financing! Here’s how you can nurture your business’s financial profile for now and the future:
1. Pay Your Bills On Time
It may sound simple but one of the fundamental metrics used to calculate credit score is payment history. Bills that are paid promptly and in full help establish positive credit, while late and missed payments will lower your credit score. Using direct debits to keep on top of your regular expenses can help minimise the workload associated with this, but if you choose this option, you need to ensure there is always enough cash in your account to cover scheduled debits. A bounced payment will negatively affect credit score.
2. Minimise Debt Levels
The amount of debt your business holds will also affect its credit score. The technical term for this is credit utilisation ratio – the amount of debt compared to your business’s credit limit. High debt levels means your business already has plenty of debt obligations, and lenders are less likely to think it can handle more. Therefore paying off existing debts, before pursuing a new business loan, will improve your score. Similarly, closing inactive accounts can help with financing eligibility.
3. Let Your Credit History Grow
One of the unavoidable facts about credit is that it takes time to establish. A new business is considered inherently riskier than a long-standing one; lenders like to see a pattern of good financial behaviour over an extended period of time. So one small way to improve your business’s credit score is to simply give it time. From start-up, create good financial habits (such as paying all bills on time). If there have been credit issues in the past, prioritise steps that will improve it as quickly as possible.
4. Limit New Credit Applications
When you apply for a new credit product, such as a business loan, the lender you apply to will perform a credit check in order to assess your application. This credit check acts as an indicator you’re thinking of increasing your debt levels, and so has a (small) negative impact on your business’s credit score. This is why it’s important to limit the number of new credit applications you make at any one time. Do your research before applying for a business loan, so that you’re only making one application.
5. Mix Up Your Types of Credit
Another factor in credit score is whether a business is able to successfully manage multiple different types of credit. A business that shows a positive history in managing traditional loans, credit cards, asset-based loans, and other types of loan, is considered a safer bet than a business that has a history of only managing one type of loan. So to improve your business’s credit score, try to have a mixture of different credit types – while still keeping your overall debt levels as low as possible.
6. Keep Your Accounts in Good Order
Well-kept accounts that are filed correctly and on time is a sign of financial prudence, and can help a business appear more favourable to lenders. This is not just about what’s in the accounts, it’s about how you as a business owner are taking responsibility for following proper financial administrative steps, boosting transparency and credibility. So don’t let paperwork take a back seat to other operational matters. And make sure that any business changes (such as registered office address, directors details, and so on) are promptly updated with HMRC and Companies House.
7. Check Your Credit Report for Errors
Your business’s credit score is kept track of by several major independent organisations – but they’re not infallible. Mistakes can and do occur, and these can negatively impact your business. So it’s worthwhile scheduling a regular check of your business credit report, so you can identify any errors and rectify them as quickly as possible.
8. Check Who You Work With
Not all risks to your business’s credit score come from within; sometimes you can be let down by suppliers or customers, impacting your cash flow and potentially harming your credit. So consider performing credit checks on those you regularly do business with and who have the potential to impact your bottom line; just because you’re being financially responsible, doesn’t mean they are.
9. Maintain a Healthy Cash Flow
The ability of a borrower to repay their loan is the fundamental concern for a lender, and one way to alleviate this concern is to maintain a healthy cash flow. Plenty of cash coming in, regularly, shows your business is likely to continue to have the funds to make its loan repayments in the future.
10. Don’t Ignore Your Personal Credit Profile
Lastly, don’t overlook the personal credit histories of all business owners. This is especially true for newer businesses, small businesses and sole traders, but any business may have its owners’ credit histories checked when they apply for a business loan. Bad credit or a significant credit event in a business owner’s past can impact their business’s ability to secure financing.
Not all types of business financing rely on credit score; if your business needs funding that’s based on cash flow rather than credit, talk to Swiftfund to find out how a merchant cash advance could work for you.