Business finance is often a necessary step in growing your business – whether this be to help cashflow, expand the business, upgrade equipment or machinery, undertake new marketing promotions, or refit / renovate your premises.
With tightening of credit in the financial sector, and more diverse loan options available to business, it’s important that businesses understand what financiers are looking for when it comes to lending.
The first step is understanding your business credit score. A business credit score is a 3 digit number which is provided by the credit bureaus. It’s different to a personal credit score, because it’s calculated using commercial indicators. Many businesses don’t know their score or understand how it’s calculated. It’s important to understand what this number means and what you can do to change it if needed. Some credit score services can leave a footprint which shows to potential lenders, but some do not so it’s important to select a service which is discreet as some services will show your investigations to potential lenders – this may not work in your favour.
Your credit score helps lenders to evaluate the health of your business and whether you’re a good risk. Not all lenders use the credit score solely in any lending decision, but it certainly carries weight with all lenders.
What can negatively impact your business credit score?
- Negative history in creditor payments are a big one – not paying your creditors on time can really impact your business credit score including late, defaulted or non payments
- Current debt levels and repayment history
- Debtors and poor management of this area can impact cashflow and your ability to repay a loan
- Liens against your business
- Court judgements or bankruptcies or any external administrations registered against the business
- Potential loan enquiries – any time you apply for credit this is added to your record.
Your credit score is just one aspect, but a deeper search into your full business credit profile is a good thing to have, especially if you’re looking to obtain finance.
New or young businesses need to work hard to establish a business credit profile, and use the opportunities available to strengthen their credit profile. Whilst many new businesses avoid using credit, it pays to use some credit responsibly because this starts to build your business credit profile. Avoiding credit altogether will make it more difficult for potential lenders to assess your risk.
Establishing good trade relationships with suppliers is a good first step as this will demonstrate your ability to manage credit, which gives lenders a good payment history to assess.
Business credit cards are also a good way to establish your business credit profile. Just be sure to keep your personal and business credit card charges separate to avoid blurring the lines.
Keeping your books up to date
Keeping your books up to date is critical in being seen as a good business owner – understanding your business performance, cashflow, debt levels, debtor levels and growth plans is a positive when seeking finance. Having a business plan and business cashflow projection are also important and can be beneficial in the assessment process.
Pay your tax debts
New draft legislation (not yet passed) will also give the ATO (Australian Taxation Office) powers to release information to credit reporting agencies about any tax debt you may have. These powers will give the ATO the ability to release information on organisations with a tax debt of at least $10,000 which is overdue by more than 90 days, and the business is not effectively engaging with the ATO in regards to repayment of the debt.
Unsuccessful loan applications will also sit on your record, so it’s best only to apply for credit if you really need it. Give your business the best chance for success by preparing for your application in advance and select the right lender with good terms and the best chance of approval.
Your Evolve Bookkeeper can help you keep your books up to date to endure you are always on top of how your business is performing. If you ever need to apply for finance, you can rely on us to provide reliable financial information to make your application easier. If you need more reliable bookkeeping, talk to us today.