As interest rates rise and inflationary pressures increase expenses for SME’s, it is fair to wonder for how long these entities can avoid a debt trap? So shortly after the OECD reported on reduced bankruptcies and the outlook started to improve, the pandemic and the war in Ukraine came along, which now threatens to undo recent progress.
Despite being frequently left out of mind, business credit is incredibly important for businesses, especially newer ones. Having a good business credit score grants access to capital that companies would not otherwise be able to acquire – this cash is a lifeline, and can be used to fund everything from general expansion to general expenses and the hiring of staff.
It is argued that not enough small businesses are aware of the fundamental importance of a good business credit score, and as a consequence, a shockingly high percentage of small businesses are in fact denied loans due to poor business credit. This article will attempt to remedy this problem by calling attention to the importance of business credit for brand new businesses.
What Is Business Credit?
So, what is business credit? Put simply, it is a reflection of a company’s general ability to be trusted to repay loans; lenders use this rating to judge whether a business is safe enough for them to risk investing in you.
Ultimately, a business’s credit score will be the paramount factor in the decision whether to (or not to) extend a loan to a business. The rating itself is composed of several sub-indicators of a company’s reliability to repay their financial obligations.
These include: the number of times a business has applied for credit in the past, whether they stay within their overdraft limits and whether they file their business accounts on time, amongst other things.
Why Do You Need A Good Credit Rating?
The response to the question of why a business could need a good credit rating is multifaceted, so the answers provided in this article will highlight just the most important points.
Financing
Businesses, regardless of size, will at one time or another, require funding through a loan; it is common for small businesses to require loans more often than their larger counterparts. That being said, regardless of how much a business needs the financing of a loan, it will be inaccessible to them if they have a credit score that is too low.
Legitimacy
As disheartening as it may sound, a good business credit score is often a hoop that smaller businesses must jump through in order to collaborate with larger businesses. This is because the latter will commonly vet their prospective partners by verifying they are not a risky partner pursuant to their credit score.
Possessing a good credit score could be the key that a small business needs to break down the door to access collaboration with more important companies.
Accounting
Another consideration that is particularly prevalent in the minds of smaller-sized businesses is the separation of personal and business capital. This aids in the tracking and analysis of business costs and profits plus, handling tax liabilities becomes significantly easier too.
Especially in smaller businesses, for whom much of this will all be new, the benefit of easier accounting cannot be overlooked because of the pivotal part it plays in a business’s credit reports.
Image Credit: TRUiC
How can you check your Business Credit Score?
Scarily, a large proportion of small businesses indicated they were not even aware how they could check their business credit score. Luckily, the solution to this problem is very simple as there are a great number of credit bureaus online that will provide quick and in-depth accounts of their clients’ business ratings.
If a business is willing to pay a little more, this report can even sometimes be downloaded so that you can analyse it in more depth. Should a report not be able to be created for whatever reason (e.g. because there is insufficient information on your business to provide a report), these agencies will contact your business to inform you of this as well as how you can fix it.
You cannot provide too much information to these credit analysis services, the more that is given, the analysis produced will be more accurate and detailed. Do not lie on these forms, as these agencies can find out, which will be harmful to your business.
Closing Statement
To effectively build the business credit of a new business, numerous factors are involved. Yet in a period where interest rates are rising, it is fair to ask: should SME’s bury themselves under debt, or is cash king?
