Check that report
Before applying for any loans, it’s important to make sure you know where your credit score currently is with the help of sites like ondeck.com.au. Not only is it one of the most important factors a lender will consider when deciding whether or not to approve a loan. Credit reports are also frequently riddled with erroneous reports that can damage your rating. With the reliance on credit cards, equipment financing, small business loans and more, you could end up costing yourself more than you should in higher repayments caused by poor credit scores. Some business owners will also make the mistake of believing that their business credit is the same as their personal credit, while this isn’t always the case.
Work on that credit
Your credit score is, generally speaking, a record of how reliable you are when it comes to taking loans and signing on to long-standing financial agreements. Even if you have never failed to repay a loan or never missed a bill in business, you may not have the credit history you need. In many cases, this is because you have no business credit history to speak of. While you’re not applying for any loans or financing, you should be taking the time to work up your credit bit by bit. Open a business bank account and register with a business credit bureau. Avoid using your personal credit for business loans or financing. Unlike business credit, personal credit is negatively affected by having a large number of credit agreements at once.
Know what lenders actually want to see
Conversely, don’t believe that your credit report is the only thing potential lenders want to see. It’s a big factor, but not the only one. How professionally you handle your application, proof of your capacity to pay back the loan, and having some existing capital can all help make your future loan applications more successful. Sometimes, lenders will also want to know how exactly you plan on spending the money borrowed. For a medium-to-large business loan, for instance, you need to have a thorough business plan at the ready to reference. Beware pre-approval for loans, too. While you might have a successful loan pre-approval, it’s still possible that mistakes in the application process can lead to a denied loan.
Don’t take too many little credit risks
Your credit can be a hugely effective tool for helping you invest in equipment, scaling the business, improving your operations and so on. But to many, the “company credit card” becomes little more than a tool for convenient, easy spending. When you’re looking to fund the business, make sure you’re funding it through the right methods for the right purpose. Don’t overuse your personal or company credit cards and make sure you have a consistent repayment strategy that you take a closer look at every month. It’s all too easy to find yourself relying on those credit cards so much that the necessary repayments make a huge dent in your cash flow.
Be specific with financing
Why you need to use your credit can go hand-in-hand with whom you get your funding from. If you have a diverse range of needs to help establish or scale your business, then a bank loan or an agreement with an angel investor might be the most reliable option. But what about when your needs are more specific. If you need more equipment or vehicles in the business, it’s a good idea to go directly to those who finance and sell the appropriate equipment such as robsinclairfinance.com.au. Finance usually has a lower interest rate than a straight-up loan, with funding more readily available to those with lower credit scores as well.
Don’t entangle personal and business
As mentioned, it’s a bad idea to make use of personal credit for business purposes. For one, it vastly increases the amount of risk directly to you. The volume and size of business loans can also negatively affect your personal credit score even if you manage to make all your repayments on time. Justdone.com.au recommends separating the business accounting from your personal cash entirely. Using your business’s credit improves your credibility much faster, meaning you have more borrowing power in a much shorter time frame. There are, of course, tax benefits to having a clear line of separation between business and personal expenses. It’s a lot easier to claim tax benefits when you have proof that certain purchases are purely business related.
Know what damages your business’s credit
There are too many business owners not fully aware as to what can negatively impact their credibility. Some of the damaging factors are more obvious than others, like defaulting on loans and late repayments. Other mistakes, as shown at thebalance.com, might not be immediately obvious. For instance, co-signing someone else’s loan can be dangerous, as your credit can be affected by their own failures to repay. Closing old credit accounts that have been fully paid off can be a mistake, too, as it makes your credit history a little smaller. Even paying loans ahead of time can be risky. Lenders want to see that you can reliably stick to the letter of a credit agreement and early repayment can be seen as just another way of failing that agreement.
Credit and debt shouldn’t be treated as a bogeyman that your business must avoid at all cost. So long as you’re using it for the right reasons, aware of how it impacts your financial standing, and always have an exit strategy, it can help you take your business to new heights.