Businesses need to spend money to make money. And if they don’t have the liquidity to pay capital expenses, they need to be able to borrow. Borrowing and debt may seem intimidating to business owners. But they are a perfectly healthy and normal aspect of your business finances.
However, while businesses should not be afraid to borrow, they still need to box clever when it comes to financing. Not all business credit is created equal. Borrowing large amounts at high rates of interest can become a yoke around your neck, putting a squeeze on your cash flow for years to come.
The better your business credit score, the easier it is to borrow at lower interest rates and find credit with more advantageous terms. If your business credit score is looking the worse for wear, here are some ways in which you can improve it.
Finding out your business credit score
Before you can take steps to improve it, you need to be able to check your business credit score. You gain nothing from burying your head in the sand. Even if you receive an unpleasant surprise when learning your business credit score, there’s always something you can do to improve it. Get into the habit of checking regularly, and you can see the impact of your operations on your credit score in real time.
Understanding how business credit scores are calculated
Your business credit score is based on very similar metrics to your personal credit score. It is determined by a credit rating agency (CRA) and based on several factors, including:
The total amount of money that you owe
How old your debts are
Your repayment history
Your credit mix (loans, credit cards, mortgages, etc.)
If your credit score is less than stellar, it doesn’t necessarily mean that you can’t get credit. There are plenty of loans for businesses with poor credit scores out there. However, these are high in interest with less than favourable terms. Improving your credit score will allow you to borrow more while paying less in interest and enjoying terms that make it easy to manage your business finances and maintain liquidity.
Improving your business credit score
Now that we know the importance of your business credit score, and how to check it, let’s look at some practical ways in which you can improve your credit score.
Startups, ensure your personal finances are impeccable!
If you run a startup, you will have a very slim business credit record. As such, lenders will look at your personal finances to ascertain your eligibility for credit. So make sure that yours are impeccable!
Pay your bills on time
This is pretty much a no-brainer. Paying your bills on time helps your credit score and your relationship with suppliers. If you’re struggling to pay a bill on time, reach out to your suppliers and see if you can renegotiate terms. This will allow you to maintain cash flow without damaging your credit score.
Borrow small and repay quickly
Establishing a credit record is important. And if you can repay your debts quickly and in full, this can help you to build a strong business credit score. So start out by borrowing in small amounts and repaying quickly and in full.
Make fewer applications
As with your personal credit score, applying for multiple sources of credit in a short space of time can damage your credit score. It can be a red flag for creditors as it may indicate that your business is facing financial difficulty.
Avoid being taken to court
Finally, if you ignore your debts, you stand a real chance of being sued for the money. County court judgements (CCJs) are credit score kryptonite, and can have serious and long-lasting implications. The good news is that CCJs are easy to avoid as long as you are proactive in communicating with your creditors if struggling to pay suppliers. If you do find you have a CCJ against you, you can mitigate the damage it does by paying off the debt straight away and in full.
We can help
If you’re interested in finding out more about your business credit score, business loans, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.