How good credit rating can make or break business
How a good credit rating can make or break your business
There are a lot of things to be mindful about when you are starting or trying to maintain a business, one of the most crucial of which is to retain a good credit rating.
Credit ratings are essential to a business as they tell potential shareholders and banks that the company is worth investing in and capable of repaying any loans they have borrowed.
Similar to individual credit score reports, credit rating agencies generate credit ratings for businesses, by factoring in key aspects of the company’s financial activities such as payment histories, age of credit history, debt and debt usage, industry risk and company size.
Maintaining a good credit standing may sound like a simple task, however, it should not be taken lightly as low scores tend to attract a great deal of negativity. Professionally, your business will be deemed unreliable, which will deter shareholders and essential parties from initiating collaborations or continuing their relationships with you. Not only that, it will also be harder for you to rebuild your reputation once your credit rating has lowered.
Here are some ways to maintain a good credit rating for your business.
Pay your bills on time
First things first. There is no easy way to achieve and keep a high credit rating. It’s a process that takes regular monitoring to and starts with paying your bills promptly or in advance, while keeping a detailed record of each transaction. Aside from submitting data to credit rating agencies to monitor business financial activities, internally there should also be a set of eyes keeping detailed notes on debit and credit. This is to ensure that you can quickly notice any complications or wrong tabulations by credit rating agencies and submit the necessary information for a review of the rating.
Aside from keeping records, you should also know exactly when your payments are due and pay them in advance where possible to avoid any blemish to your credit report. If necessary, set notifications or auto-pay instructions for payments so that you won’t make late payments, which would hurt your business credit rating.
Maintain a healthy debt to credit ratio
When applying for a bank loan or mortgage, one of the most important pieces of information that will help banks decide if your business will be able to make payments on time is your Debt to Credit Ratio. The Debt to Credit Ratio helps banks to assess if you and your business are capable of fulfilling financial obligations. This ratio can be simply calculated by dividing your total debts by your total profit. A lower the ratio is considered more desirable.
Set a limit to your credit usage
Setting financial limits for company expenditures is imperative for a good business credit rating. These include business expenditures for networking, traveling, capacity expansion, hiring personnel to take charge of the business and so forth. It is advisable to set a limit after factoring in your monthly income and profits to reduce the likelihood of defaults in your monthly expense payments. Some steps you can take include reducing the limit on credit cards to the lowest amount deemed appropriate. This will help you become more aware of the charges being made and get notified if the usage exceeds your budget.
Control the amount of loan being utilised
Whenever a company applies for a bank loan, it does so at the risk of lowering its ratings. With that in mind, it is wise to refrain from utilising your total bank loan funds all at once. Instead, try to assert a limit in order to have greater control of the flow of money going in and out of your account.
Avoid multiple credit cards or loan applications in a short period of time
All expenses may seem like a necessary investment for the future. However, you have to keep a keen eye on the cash flow that is flowing in and out of your business so that there won’t be a need for frequent loan applications. Try using a separate business credit card for everyday purchases for the company, such as groceries, supplies, utility payments or travel.
A business credit card won’t make a huge mark on the rating as long as you make the minimum payments on time. However, do not apply for multiple cards at once. It will result in exhausting your funds and you may even hit bankruptcy.
Avoid becoming bankrupt and having derogatory remarks on the credit report
Sometimes it’s the fault of the season that businesses are brought down to bankruptcy. But once bankruptcy hits, your credit rating will drop as well. In an effort to remedy that, there should be an allocation of fund for emergency purposes, either to cover the losses or to make timely payments.
In conclusion, credit ratings are the first thing potential buyers and clients will look at when assessing your business. A great deal of importance should be given to it to make a good impression in the market; it is always a good idea to go through your business credit ratings yourself and keep regular tabs on it because your livelihood depends on it. If any error or discrepancy should occur, you should report it instantly. It helps to sign up for alerts that will notify you of any changes to your credit records so that the necessary actions can be taken to rectify any problems that crop up.
The information provided herein is intended for general circulation and/or discussion purposes only. Before making any decision, please seek independent advice from professional advisors. No representation or warranty whatsoever in respect of any information provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake any obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.