If you have ever taken out a bank loan, a personal loan, or a mortgage, then you know you have a credit score.
Simply put, this is a figure telling your creditors how reliable you are when it comes to paying your debts on time. It includes a plethora of information about your company’s financial situation, from some basic details such as the type and size of your business to your repayment history, legal filings, bankruptcies, and credit obligations.
Your company’s credit is scored on a 0-100 scale. Logically, the higher your score is, the more trustworthy you are.
So, if you’re planning on securing any type of business funds, you need to make your credit score as shiny as possible.
And, here are a few techniques that will help you do so.
Pay your Bills Regularly
Making late payments will hurt your credit score and affect your business credit reporting. Namely, each overdue repayment you make will stay on your company’s credit report for 5 years. Precisely because of this, it is paramount that you make all payments on time or even before the deadline.
It goes without saying that this is one of the simplest ways to improve your credit score and, at the same time, build a strong relationship with your creditors.
Now, making payments on time is easier said than done.
First, staying on top of mountains of bills is not that easy. Fortunately, there are numerous awesome financial management and bill reminder apps that will help you keep track of your bills and notify you when your due date is approaching.
Second, one of the most common problems you may face is the lack of resources. But, before you decide to apply for yet another loan, you should consider hiring an accountant. They may help you manage your finances more effectively and help you pay your bills effectively.
You should also learn how to prioritize your bills. For example, not paying your taxes on time means facing numerous penalties. This is why they should be your no. 1 priority. The same goes for your key vendors, payroll, insurance, and rent.
Apply for a Loan only if You really need It
If you think that, whenever you face a cash flow problem, a new loan will solve it effectively, you’re wrong. Taking out as many loans as possible is a big no and here is why.
Namely, every time you apply for a loan (any form of loans), your credit score plummets. Now, if your credit score is strong, then all this will be temporary and pretty insignificant. On the other hand, if your credit is poor, this decrease may cause additional problems to you.
Worse yet, every new loan you take out doesn’t affect your credit score only. It also reduces your chances of being approved by banks in the future.
Namely, once you apply for a loan, creditors will examine your financial health thoroughly. They will also calculate your debt to income ratio, indicating how much of your budget you need to dedicate to your debts each month. Based on what they find out, they will decide whether you approve your application or not.
Cut your Credit Utilization Ratio
One of the most significant things creditors analyze when assessing your credit score is the credit utilization ratio, or the percentage of credit used compared to your credit limit. Apart from your payment history, this is one of the major factors affecting your eligibility for a loan.
So, what’s a solid credit utilization ratio?
Well, the best one is 0%, meaning that you’re not spending your credit at all. However, for small businesses with limited budgets, that’s not possible. Now, decent credit spending is the one lower than 30%, meaning that you’re using less than 30% of the total sum available. Anything above this figure may affect your credit score.
Here is how to do keep your credit utilization ratio under 30%:
- Decrease your balances
- Ask for a credit line increase
- Cut your credit card spending
- Consider opening a new line of credit
- Pay your bills several times on a monthly basis
Keep Track of your Credit Report
One of the most common mistakes small business owners make is not tracking their credit reports regularly. You can obtain your credit report from all major credit reporting companies. And, even though it’s not free, using it will definitely pay off.
Now, every credit report consists of a few vital elements, and these are:
- Payment history
- Credit utilization
- Length of credit history
- New credit
- Different types of credit you hold
Once you understand your score, you will figure out what financial management strategies work for you, make data-oriented decisions, and raise your score effortlessly. It’s also a great way to mitigate any potential risks. For instance, when reviewing your credit reports, you should pay special attention to suspicious actions, transactions, or investments. Anything unusual may indicate that you’ve become a victim of identity fraud and you need to react fast.
Over to You
When it comes to securing a small business loan, your credit score is immensely important. However, a poor credit score shouldn’t worry you. Remember that it is fluid and that you can improve it gradually by making the right decisions.
Hope this helps!