If your business is to grow, it will need investment. While there are a range of sources you can turn to in order to secure funding, if you're looking to raise finance by borrowing, you'll need to be able to demonstrate that you're in a strong position to repay any debts, and that means having a strong business credit rating.
Your business' credit rating is the number one indicator of your financial health to potential lenders and investors, but it reflects more than just your current finances. It's also a measure of your firm's trustworthiness. A poor score will have a major negative effect on your ability to secure funding, as it will be a red flag to lenders that they can't rely on you to service your debts effectively.
Therefore, taking steps to improve this score is one of the most important things you can do to ensure your enterprise is able to grow. Here are a few things to keep in mind.
Know where you're starting from
Making efforts to improve your credit score won't be much use unless you can see the impact your activities are having, which is why it's good practice to check your credit score on a regular basis.
There’s still a belief that frequently checking a credit score with a credit ratings agency (CRA) can actually harm it, as it gives the impression you're worried about your finances, but this isn’t necessarily the case. In fact, a 'soft check', where you’re solely monitoring your score won't have any effect. It's only a 'hard check', when you're actually applying for credit, where this is a factor.
You may think such concerns won't be relevant for large enterprises with strong reputations, but knowing your credit score and taking steps to improve it should be a concern for even the largest enterprises. If the economy takes a downward turn and access to funding becomes harder, a strong score can be a crucial advantage in ensuring you're able to grow in a challenging environment.
Don't miss your payment deadlines
It should go without saying, but ensuring you're meeting all your financial obligations on time is the most important thing you can do to maintain a good credit rating. However, even the largest enterprises often fail to do this. In the UK, for example, it's estimated that 27% of invoices are paid late, with some large firms waiting as long as 120 days to settle invoices.
This isn't just bad news for suppliers. Missing payment deadlines is one of the biggest red flags used by CRAs when determining your score, and even if you’re settling invoices in full at a later date, it's an indicator you aren't serious about your responsibilities. If you're willing to pay suppliers late, what's to say you won't take the same attitude into debt repayments?
Keep within your means
Another important step in boosting credit is to demonstrate how you repay debts by running a credit line. Firms that borrow frequently, but ensure they’re paying it back on time will have a stronger credit rating than those that never borrow, even if this seems like the most prudent of financial steps.
This means ensuring you use your business credit cards and keep on top of the repayments every month. However, it's important to remember that just because you have credit available, you shouldn't be using it all.
It's also important to keep your credit utilization rate under control. This refers to the proportion of credit you use out of the total amount that’s made available by your lender.
In other words, just because you have a $10,000 credit limit on a card, for example, it's not a good idea to test this limit every month. In normal circumstances, you shouldn't be using more than 20% to 30% of your available credit in any given month, as it means you'll have less leeway in an emergency.
The best way to achieve this is to reduce your spending, but if this isn't possible, asking for an increase in your limit - even if you never plan to go near it - can be very useful here.