Whether you’re running a small business or a giant franchise, you will need external financing to grow your business. Therefore, it’s crucial to manage its financial well-being. This includes building a strong business credit that indicates a healthy credit history.
Your business credit is a snapshot of your creditworthiness and increases the confidence of lenders while approving your loan request. But building a good business credit takes time and effort. Here are 5 tips that will help you give your business credit a healthy boost –
1. Differentiate between your personal and business credit profiles
Many business owners, especially the ones who are just starting out, tend to fund business expenses using their personal credit cards. And if you’re doing the same, it’s time to stop. Keeping both these profiles separate will help you reduce their effect on one another. It not only guards your personal assets but also makes it easier to apply for business loans.
By establishing an independent credit profile for your business, you can avail of a much higher financial credit than as an individual. One simple way to do this is to pay for all business-related expenses using the business bank account and personal expenses using your personal credit card.
Understand the factors that affect business credit
Just like personal credit, multiple factors come into play while calculating your business credit. When you apply for a financial loan, lenders will assess you on the following parameters-
- Reliability– Lenders will evaluate your credit history to determine your repayment pattern. Your credentials, experience, education, reputation, etc. play an important role in determining how reliable you are. Pending lawsuits, outstanding debt, delinquent accounts, etc. are seen as warning flags.
- Invested capital– If you have invested personal capital into the business, lenders will view this favorably. They assess this to determine your commitment to the success of the business. Your investment can either be in resources or capital like equipment, stocks, property, etc.
- Repayment ability– To determine business credit, lenders will assess the capacity of the owner to repay the loan. For this, they will evaluate your household income, business revenue, outstanding debt, cash flow, invested capital, etc.
- Personal credit– Your personal credit is separate from your business credit. However, a strong personal credit will help you secure funds for your business easily. It indicates that you manage your finances responsibly and increases the confidence of the lender while approving your loan.
Maintain a low credit utilization ratio
The credit utilization ratio of your business plays a major role in determining its financial health. It simply means the portion of credit you’re using out of the total available credit. For example, if the available credit for your business is Rs. 10 lakhs and you use Rs. 2 lakhs, your credit utilization ratio will be 20%.
A low utilization ratio indicates that the business is only tapping into a small portion of the available credit and is using its cash flow efficiently. A high utilization ratio indicates that the business is in financial duress. It is ideal to maintain this ratio under 10%. A credit utilization ratio of 30% or more will harm your score.
Establish vendor credit smartly
Not all suppliers report to credit bureaus. But working with the ones that do will help you build strong business credit and maintain transparency. When you pay your vendors on time, they’ll report your prompt payments, establishing your creditworthiness with the credit bureaus. This way, every payment will help you increase your business credit score.
You can also use vendor credit to increase your recommended credit limit, build a strong financial reputation, and manage your cash flow efficiently.
Monitor your business credit profile
Building a strong business credit will not happen overnight. Moreover, even one late or missed payment can take you back several steps. Therefore, it’s important to regularly monitor your business credit report to ensure you’re on track and address errors that can hurt your credit score. It’ll also help you gain insight into how to improve the score and avail of business credit at lower interest rates.
Not only this. By regularly tracking your business credit report, you can-
- Ensure that it is complete and accurate
- Keep track of changes that can impact your business
- Identify areas that need improvement
- Keep a check on who is inquiring about your business
- Prevent identity theft by tracking these inquiries
Start building your business credit today
There’s no shortcut when it comes to establishing strong business credit, and the timeline varies from company to company. Paying vendors on time, maintaining a healthy relationship with vendors, using available credit wisely, etc. are some ways to build a strong credit history, regardless of where you are in your journey. Get in touch with experts at Tata Capital to know more about building strong business credit.