The goal is always to have good credit, but it becomes much more important when it comes to business credit. New businesses must establish good credit since it makes it easier to secure capital and may qualify them for better terms from vendors.
Furthermore, some B2B goods and services may have a prepayment obligation and a strong credit rating, which can be used to negotiate with suppliers and vendors. Now that we’ve established the importance of a strong business credit score let’s look at how you can cultivate one from the bottom up.
In this week’s Let’s Talk, we asked experts how to develop a great company credit profile.
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Lisl Pietersz, Transition and communication coach, University of Sydney
“As the former founder of a small healthcare communications agency, I learned a lot in my role about effective business management, often by trial and error. This is what I would tell my younger self today about how to build a strong company credit profile:
- Set yourself up for financial success. A good starting point is to ensure that all your business details are up to date with regulatory authorities and your customers. It’s as basic as ensuring, for example, that your street address, industry, and professional email address are accurately recorded. Be sure to also register your business correctly.
- Manage your cashflow and payments. Pay your bills plus any tax and superannuation obligations on time. Check out how online accounting programs can help you to better track your expenditure, not to mention how they could help you get paid faster. An accountant or bookkeeper can give you further advice about maximising tax deductions, which enables you to re-invest in your business. You could apply for a business credit card and/or set up an account with regular suppliers; both actions will help to build a history of payments which future lenders or investors will review. Don’t forget to use your credit card wisely.
- Monitor your credit score. From experience, it can take several months to build a good credit rating, if you take the right steps. You can check your business credit by applying to a credit reporting service.”
Ben Lamb, Chief Commercial Officer, Prospa
“Regularly check that the information in your credit report is accurate.
“If you’ve ever applied for credit or a loan, there will be a credit report about you. Credit reports include:
- Your credit rating
- The credit products you hold
- Your repayment history
- Any adverse information, such as payment defaults
“Credit providers use your credit history as one element in their decision to approve your loan or credit application. You can receive a free copy of your credit report every three months and it’s good practice to obtain a copy at least once a year to check for errors. Different credit reporting agencies can hold different information so it is worth obtaining a report from each of the major Australian agencies Equifax, illion and Experian.
“Examples of errors to look for include:
- Payment defaults recorded by mistake, or you weren’t notified about
- Accounts created by mistake or as a result of identity theft
- Credit enquiries made by mistake, or you were not aware of
“Rectify mistakes immediately by contacting the credit provider and asking them to get the incorrect listing removed. If the credit provider agrees it’s wrong, they’ll ask the credit reporting agency to remove it from your credit report. If you can’t reach an agreement, contact the Australian Financial Complaints Authority (AFCA) to make a complaint and get free, independent dispute resolution scheme.
“When applying for funding, a strong credit profile may assist your application.”
Yasinta Widjojo, Head of Growth and Marketing, Pin Payments
“Building a strong credit profile is essential as a business owner, but it can also be challenging in the early days of building your brand.
“However, there are a few ways you can improve your business credit profile. Firstly, start by having a separate business and personal profile, do not jeopardise your personal credit score or make yourself personally liable on account of your business. In general, many business owners use a mix of personal and business credit and consequently end up with a poor credit score.
“Likewise, try to build a strong relationship with your customers and be vigilant on bad actors/customers who may impact your cashflow or credit. One good point to note is that chargebacks don’t affect a business’s credit profile. Still, it will cost you time and money. Most importantly treat your business as a business, not an extension of your personal life when it comes to finances.”
Patrick Coghlan, Chief Executive Officer, CreditorWatch
“When it comes to your business credit profile, first impressions matter. Your credit profile helps other businesses quickly evaluate whether to do business with you and is a key factor in securing the finances needed to build or scale your business.
“While it takes time and incremental actions to build a strong credit profile, there are achievable ways to do so and secure your business’ future:
- Pay bills on time. It goes without saying, making sure you are continually paying your bills on time is the best way to improve your credit profile. This is only possible with a strong cash flow. Using credit management data to see the payment history of your customers allows you to avoid poor paying customers, thereby reducing exposure to bad debt and strengthening your ledger.
- Reach out for help if you’re struggling to make payments. If you find yourself overwhelmed by an influx of invoices, explain the situation to the biller and ask for an extension on your payment terms. If you do get an overdue payment notice, act immediately. By taking immediate action you’ll avoid the ill effects of default registrations, mercantile enquiries and court actions in the future.
- Keep tabs on your business credit profile. You should also make it a habit to check your credit report with a credit reporting bureau and regularly use tools that give rich insights into the state of your profile and those of your customer and suppliers.”
Adele Andrews, Director/Mortgage Broker, Australian Property Home Loans
“A strong business credit score is every bit as important as an individual score – especially if you are looking to scale and grow.
“In order to maintain this, there are several key matters you must ensure are in hand, at any point of your operation:
- Defaults to suppliers – this will hit your score significantly and impact your ability to obtain credit.
- Number of enquiries – the more you enquire, the more “hits” your score will take. Even if you don’t end up using the facility.
- Late payments – these are all recorded and will impact the perception of your ability to meet your repayments. Tax payments, credit facility repayments.
- The director – any bankruptcies or court judgements of a director will impact the score of the business. Make sure both the individual and business is maintaining good credit practices.
“A good credit score can make or break a finance application. If there is any doubt, consult an expert to see where your credit score sits, to avoid any surprises.”
Sean Wiles, Partner, McGrathNicol Advisory
“A business’ credit profile is often considered an indicator of financial stability, and is used as a metric to determine whether a business is a suitable counterparty. In McGrathNicol’s latest Working Capital Report, our sample of companies experienced an increase of 1.8 days in the time it took to collect from their customers, impacting cashflow and contributing to an additional $11.1 billion being ‘locked up’ in working capital.
“Developing a strong credit profile starts with the fundamentals of doing business. It requires strong customer and supplier management, agreeing terms of trade that make mutual sense, and actually delivering against those terms. If these things are done and done consistently, business will have a better chance of both collecting from their customers and paying their suppliers on time. What also helps is good process: a clear set of roles, responsibilities, and procedural guidance that underpins the interaction with customers and suppliers at all points in the cycle – when contracting, ordering, billing, collecting, processing, and paying. When done well, businesses not only benefit from faster and more regular cash flow, they also become the preferred and trusted ‘business partners’ for other organisations in their network.”
Jennifer Richardson, Founder and Director at 123 Financial Group
“One of the most important things you can do for your business is to build your business credit file, so that when you are ready to scale or invest in your business you will have the ability to get funding and funding at a good rate.
“Whilst we all accept that having a good credit score as individuals is really important, we forget that it is just as important as business owners to work on our credit score.
“Regardless of the size of your business, from small local businesses to large multinationals, a good business credit score will give an indication of the financial stability of your business and its ability to meet its ongoing financial commitments. This may be the difference to your business being awarded contracts or missing out, having investors decide that your business is worth the risk or choosing to invest elsewhere, and obtaining funding when you need to invest or cashflow is temporarily tight.
“Your business credit score shows that your business is a worthy and reliable business.”
Scott Mason, General Manager Commercial and Property Services, Equifax
“Current economic turbulence may have many businesses, particularly those impacted by inflationary pressures, supply chain delays and extreme weather events, concerned about their credit risk profile.
“The good news is, our latest Equifax Quarterly Commercial Insights revealed overall business credit applications grew +3.1% in Q3 2022, compared to the same period last year.
“Nevertheless, it has never been more critical for businesses to understand, manage and improve their credit situation. Understanding credit worthiness helps when you are looking to support cash flow, borrow capital to expand your business or set trading terms with your suppliers.
“Here’s how to boost your business’s credit profile and improve its credit score:
- Acquire a copy of your Business Credit File to understand how banks and other credit providers assess creditworthiness. These reports also act as a safeguard mechanism by advising you of suspicious changes to your business’s credit activity.
- Close unused credit accounts and limit your business’s dependence on multiple loans.
- Set up repayment reminders to lenders and suppliers, helping ensure timely financial planning and payments processing.
- If you’re disputing an invoice, focus on resolving this dispute quickly. Don’t let the dispute become deprioritised and the time to resolve drag on.”
Guy Callaghan, Chief Executive Office, Banjo Loans
“When you request a loan, a lender will first check that your current finances are healthy and your cash flow will allow you to make the repayments.
“One way to improve your business finances is to look at reducing both your Cash Conversion Cycle (or CCC – the capacity to turn your goods and services to cash) and your inventory days.
“The average CCC for small businesses is 84 days. That’s nearly a quarter of a year!
“How to get that 84 days down to something more manageable? Start by assessing your customers’ risk. You can use credit reporting bureaux to access Australian companies’ data and calculate their risk level – and make an informed decision from there.
“You can also provide smarter payment options for your customers to fast-track invoice payments. With more people paying online after hours, include a simple “Pay Now” button in your invoice email.
“When you need to chase up payment, don’t forget your empathy – and make sure you send a message of thanks when they do pay.
“Reducing your CCC by as little as 10 days can improve your net cash position quite significantly. You can do more in your business with that money, and gain access to more working capital.”
Sarah Wells, Director, Tailored Banking and Finance
“Just like your personal credit profile a strong business one will develop the lending and risk DNA of your business. You can also use the insights to help better understand the credit worthiness of your clients and customers, which may assist you with your own internal processes.
“Most of your credit score will come down to how often you apply for credit (frequency) and if you pay your debts on time (character).
“My top tips are:
- Only apply for credit if you need it – you can make enquiries but ask for them not to be recorded on your commercial credit report unless you actually apply.
- Automate payments via your accounting software or banking platform.
- Keep an eye on cash flow and forward plan – if you think you’ll be late with a payment – contact the provider and ask them to defer a payment don’t miss it.
- For riskier clients and customers have shorter due dates, upfront deposits and interest or late fees.
- Be aware that large organisations will report you if you miss a payment.
“Improving your business efficiencies and managing your cashflow is the best way to improve and manage your business credit score.”
Anil Menon, Group Chief Financial Officer, Leading Edge Retail
“Building a strong credit profile takes time and patience. The first step for any business is to understand factors that contribute to their overall credit scores, such as payment history, credit line available, credit history, and types of credit.
“Contrary to what most people think, having existing loans and credit cards is not necessarily bad for your credit profile. In fact, they can help build your score as long as you pay the minimum amount on time, keep credit utilisation low, and don’t apply for multiple credit accounts at the same time.
“Another good credit habit to maintain is managing a healthy cash flow. At Leading Edge, we help small retail businesses across Australia with cash flow management. Our Category Members are assigned a trading credit account that they can use to purchase from a range of suppliers. Each month, we consolidate all purchases and credits into one centralised credit facility and pay the suppliers. Our central billing not only reduces administration time but also buys our Members up to 60 days to pay and helps them preserve their good credit rating.”
Brodie Haupt, Co-Founder and CEO, WLTH
“It’s important to ensure that your business credit profile is accurate, as even the smallest of errors on a profile can cause a great deal of inconvenience. Confirm that all information associated with your business’ credit profile is up to date and that any lender you choose reports to a credit bureau. This is crucial to helping build your credit score and ensures you reap the benefits of making timely payments on your loans.
“Whenever possible, separate your personal credit profile from that of your business, and avoid using personal credit and aim to establish business credit. Although it can be difficult to obtain business credit in the early days of a business, keeping these two separate will help build a strong profile down the track, and prevent your personal credit from being negatively affected by large business expenses.”
Craig Dangar, Senior Partner Principal Consult, Vault Group Accountants and Business Advisors
“A question we are often asked, the simple answer is pay your debts on time, but what else? Limit your number of credit enquiries and don’t just go shopping for money. Avoid Buy Now Pay Later, this is dangerous for the development of your credit profile, short business credit equally will harm your ability to raise funds.
“Your relationship with the ATO is critical to managing your credit profile and now that the ATO will report debts above $100,000 businesses need to be mindful that this will severely impact the ability to borrow.
“Most importantly, have a budget and understand your cash flow, even if your business credit struggles there is a capacity to borrow where the lender can understand your business and work with you to ensure that you are a good borrower.”
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