What is the best way to establish a Business Credit?

What is the best way to establish a Business Credit?

Published on 2022-01-04

Category: Small Business Owners

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We cannot deny the fact that without the availability of funds, an entity would not be able to perform its basic operations. After establishing a business by utilizing seed capital, it will require an enormous amount of investments to capture giant markets. Having access to credit could prove to be a lifeguard for businesses. Businesses have to persuade lenders about their creditworthiness. Only then can companies establish their accessibility of funds in the market.

One of the key things that lenders look for in businesses is the ability of the business to repay their loans. Credit Rating agencies help specify repayment risk by reviewing the company's financial performance and overdraft history.

What is a business credit, and how does it work? 

Business credit is the company's ability to purchase fixed assets or equipment and raw materials on good credit terms. Business credit rating derives an entity's trustworthiness in principal and interest repayment to the lenders.

Credit score agencies usually give points to the companies based on -

  • History for repayment of principal and interest on loans or business credit cards
  • Any overdraft facility availed currently
  • The number and frequency of loans applied in financial institutions 
  • Any bankruptcies, defaults in instalments or court restrictions on the company

According to Equifax Business Credit Rating Agency, categorization is made as follows - 

  • Excellent - 833 to 1200
  • Very Good - 726 to 832
  • Average - 622 to 725
  • Fair - 510 to 621
  • Low - 0 to 509

The higher the credit score, the more the chances for loan approvals, and the better the terms on the loan.

How to establish a business credit score?

While it takes a sustained effort over a long term to ensure a healthy credit score, listed below are some of the actions you must undertake in order to ensure a healthy score that can help you borrow and grow your business.

Make timely Payments

Businesses should aim to make all payments on time to help the company avoid financial stress on the business credit profile.

Regularly Monitor the Credit Scores and Ratings

New information can negatively or positively affect the scores and ratings of the company. To help avoid undesirable surprises, entrepreneurs should regularly check their scores and ratings.

Submit Trade References to Credit Rating Agencies 

Most businesses purchase goods from vendors to manufacture their finished product or service. Suppliers often extend their trade credit to creditworthy business customers. 

By taking small steps in daily operations, businesses can increase their credit score as excellent or very good. That build up the goodwill of the company through which they can avail various benefits like excellent brand value, loyal customers, least government intervention, increased sales, and ability to retain talented employees.  

Why establishing business credit is necessary?

A good business credit score enables companies to expand the business, purchase inventory, etc., at better terms. Any business growth requires skilled and hard-working employees to get the work done efficiently. When you company’s financials are in place, you attract the best of talent.

All these activities will demand additional funds than just seed capital, enabling the company's affordability. Financial Institutions, Banks, Venture Capitalists invest their funds only to those companies that are reliable enough to repay. These investors cannot assess a company's creditworthiness by themselves. Credit rating agencies do the job for them.

The credit score is essential for many aspects of the business as follows -

To speed up the borrowing process

It creates a credible identity for an entity in the eyes of investors. Therefore, it boosts the application process so that companies don't have to face interruptions in their business. 

Get a higher loan amount

If a company lacks trustworthiness among investors, it may suffer from insufficient funds. Investors may provide a lesser amount of funds than required, leading a company to disturbances in daily operations. 

To benefit from lower interests and flexible tenors - 

Since the company has a good credit score, lenders may consider it less risky to sanction higher loan amounts at lesser interest rates. The investor may allow the company to choose flexible tenors as per its convenience. 

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