You often hear about maintaining your credit score, a three-digit number given in your credit file, calculated by credit reference agencies based on your recorded credit information. Hoping that this would help qualify for a business loan, when your application is rejected, you are thrown off balance and eventually realise that a business credit rating is equally important, or of great paramount, until you need money to start your business.
A business credit rating is calculated based on business credit information in your business report. A business credit score ranges between 0 and 100, with 80 to 100 associated with low-risk borrowers. It is not likely that you can successfully take out a loan if your business credit report is not up to scratch, but you will be charged high interest rates.
Business loans are usually more expensive than personal loans, and even more so if your credit rating is less than perfect. Therefore, it is enjoined that you keep your credit rating in good condition. If you are looking for a loan for your established business, your lender would carefully look over your business credit report. However, if you are a start-up or your trading history is less than a year, your personal credit report will be reviewed.
Depending on the loan amount, your overall financial condition, and your lender’s policy, both personal and business credit ratings could be examined. So, try to keep both types of scores as good as possible.
What should you do to improve your business credit rating?
Here is how you can do up your business credit rating:
Pay off debts
First off, you should start tackling your debts. Outstanding debts will not show you to advantage. Therefore, it is suggested that at the time of taking out a business loan, you must not have any other debt yet to be settled. And if it is so, make sure that you have been keeping up with payments. Missed payments and late payments quickly take a toll on your business credit score.
Do not forget your credit card bills. Having an outstanding balance will call your credibility into question. Your lender will likely assume that your business struggles to generate enough profits to pay off bills on time. This might increase the risk of rejection, and in addition, high interest rates.
Pay your suppliers on time because your payment behaviour with suppliers will also be noted in order to calculate your business credit rating. If your business struggles to make payments on time due to some reasons, you should try to negotiate with an extended credit length and, at the same time, speed up the collection from your debtors.
Pause new credit applications
It is not a bad idea to borrow money to fund your business, but stop yourself from making several credit applications within a short period of time. Do not forget that credit inquiries are reported on your credit file. If your lender finds too many inquiries, this will work against you. If your credit rating is already bad, your score will become worse, reducing your chances of qualifying for a loan the next time.
For instance, if you apply for bad credit loans with no guarantor, you should wait for approval from a lender. If you apply to a couple of lenders at the same time, your credit score will plummet as each one will run hard checks. In case of rejection from a lender you applied to, you should wait for a few days to apply the second time. Make sure that you know the cause of rejection and fix it so that you do not have to face disappointment again.
Before applying for a business loan from a direct lender, you should carefully research the market. Choose a lender that offers competitive interest rates. Check the eligibility criteria so that you are not declined due to only incompetency to meet all conditions. Overall, you should try to demonstrate to your lender that you are a trustworthy borrower.
Open a business bank account
Opening a business bank account is another way to help improve your credit score. Separating your business account from your personal account will help you know how much cash you have to meet your business expenses. You can easily determine cash flow. Most lenders prefer the separate handling of business accounts. This helps maintain the transparency between you and your lender.
Since your lender will better analyse your financial condition, they will unlikely to be offering you more than your affordability. Even if you are a sole trader, you should try to keep your business expenses separate from your personal expenses. For instance, you can open a separate account to meet your personal expenses, and every month you must withdraw a fixed sum of money as your salary to meet monthly expenses.
In this way, you will also understand how much money you are left with for your business, which not only has to be used to cover business expenses but also to discharge a business loan.
Keep the credit utilisation ratio around 30%
Credit cards and lines of credit are too convenient. Whenever you need money for your business, you use a credit card or a line of credit. These funding sources provide you with a quick injection of cash. But do not forget that your credit utilisation ratio will be taken into account. A high credit utilisation rate suggests that you often rely on credit to meet your business expenses. This will show your business in a bad light.
A golden rule of thumb says that your credit utilisation ratio should not be more than 30%. Ideally, you should try to keep it lower than this. The lower, the better. In fact, you should be careful while using your personal credit card too.
The bottom line
Your business credit rating must be stellar if you want to ameliorate your chances of qualifying for a business loan at affordable interest rates. In order to improve your business credit score, you should carefully manage your debts, pause new credit applications, open a business bank account, and keep your credit utilisation ratio low.
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