People often ask me about importance of business credit scores. Quite simply, financial institutions won’t make loans to a person or business that is unlikely to pay the money back. Establishing a solid history of timely payments is critical to proving your company’s creditworthiness.
This does not happen overnight, however. Here are some simple tips can be extremely helpful in proving that your business is indeed creditworthy.
Some Tips:
1. Incorporate your business
Incorporation makes your business look more serious. It is a fairly simple process that can be handled by an attorney, CPA or a service such as incorporate.com. Having “Inc.” or “LLC” at the end of a company’s name does more than just add an impressive look; incorporation helps protects personal assets and can create tax advantages.
2. Write a professional business plan
A business plan provides a roadmap to profitability. It outlines goals and objectives, strengths and weaknesses, and the key selling points that differentiate a company that will hopefully lead to long-term success. Any aspiring entrepreneur must have a business plan in order to get secure funding. Lenders are unlikely to finance a company without a business plan that outlines what the company will do, who is running it and why it will be successful. Banks and other funders are taking a risk by providing capital, and a business plan helps mitigate the perceived risk involved. Describe the company goals and how those goals will be met. Update the business plan periodically to reflect the realities of operation. This is a critical step for any company that hopes to expand one day.
One thing that should not be overlooked: having a professional looking company web site impacts banks and credit card issuers. One of the first things a loan officer will do is look on the web to research the company that is applying for credit. Having a sharp, functional web site makes a company look more serious and thus a better candidate for funding. First impressions last the longest.
3. Separate business and personal accounts
Even for someone whose personal credit history has been imperfect, building a history of on-time business payments will establish a track record of creditworthiness. It is critical not to co-mingle business and personal bank accounts. Separate the accounts and then set up automatic bill payments. It’s the 21st century, why send payments via the mail when you can pay debts promptly and efficiently online? Doing this will establish a business as a better candidate for funding.
Startup companies should immediately set up bills in the company’s name. Lenders are more likely to fund to a business that has an address registered with state authorities and pays its bills each month than they are to lend money to a freelancer working from home.
4. Open a company credit card and pay it on time, in full, each month
Applying for a business credit card is a quick and easy first step toward building up a track record of prompt payment. It is an easy way to establish a positive credit history while racking up rewards points that can be cashed in for cash rebates or airline tickets. Be sure to pay the bills promptly and in full, every month. Tardy payments will negatively impact the positive credit history you are trying to build.
5. Review business credit reports regularly
A business credit score is a tool that helps lenders predict the likelihood of default. Credit ratings agencies, such as Equifax, Experian, and D&B examine factors including:
- company size and age of business
- business structure,
- industry risk
- outstanding balances of open accounts,
- payment habits,
- credit utilization,
- length of credit history,
- public records (judgments, liens, bankruptcies), and
- other factors.
Examine credit reports quarterly to make sure there are no mistakes and to be certain that judgments made against your company that were resolved months or years ago are removed from them.
6. Pay bills in advance if possible
Vendors may offer discounts for cash payments made in advance. Companies with positive cash flows can reduce their operating expenses by paying bills a little sooner. Meanwhile, the cost reductions will improve cash flow. Thus, you can kill two birds with one stone and at the same time prevent black marks for late payments. When the time comes to finance for future growth, having a history of timely payments will increase the chances of securing funding. Further, the companies that have benefited from pre-payment will likely be glad to serve as credit references when needed.
7. Run a profitable company
This may seem like a no-brainer, but there are plenty of business owners who simply enjoy the work that they do and aren’t as focused as they should be in running a profitable enterprise. Any company that has plans for future expansion and growth must prove that is profitable. This is critical for securing capital. Manage inventory, stay on top of worker schedules, and cut down on staff hours during slow periods. Look for ways to cut utility bills and other expenses without hurting the customer experience.
In any funding deal, lenders want to mitigate risk. It is important for business borrowers to prove themselves to be fiscally sound and creditworthy. These tips for increasing creditworthiness can help any business owner improve the likelihood of securing capital and pursuing the next level of success.
