One of the biggest challenges that SMEs face is to obtain funding for their businesses and improve creditworthiness. Businesses need funding for a variety of purposes, from supporting operational expenses to purchase inventory or acquire new equipment to support the growth.
According to British Business Bank, 53% of businesses are seeking finance to improve creditworthiness and their working capital. Funding from Angel Investors, VCs aside, businesses often seek funding from a financier. As such, their creditworthiness is crucial in ensuring that businesses can obtain the necessary funding for their businesses to run smoothly.
As the first step, SMEs need to understand the workings behind a business’s credit rating, and ultimately, their creditworthiness. Several influences include payment history, amount owing, the duration of credit history, credit available on hand, and the types of credit employed previously.
As a guide, there are a few factors that SMEs can focus on to help improve creditworthiness of their businesses.
Reducing Late Payments on Credit Facility to Improve Creditworthiness
Managing payments seem incredibly obvious. Yet, late payments on outstanding credit facilities still remain as the most common factor that negatively impacts a business’s credit reports. Often, late payments are the main culprit responsible for significant drops in SMEs’ credit scores. When it comes to credit facilities, it’s crucial that businesses always make payments on time to credit providers, each month, with no exceptions.
Reviewing Credit Reports Regularly
In addition, SMEs need to correct any inaccuracies in their credit reports. One of the quickest and simplest ways to improve creditworthiness is to review credit reports meticulously and correct any erroneous or outdated information. If you spot incorrect information, SMEs can initiate a dispute and potentially have it corrected or removed within 30 days.
Have Sufficient Capacity
Often, the capacity to repay a loan is critical to financial institutions. The capacity for a business is calculated based on the borrower’s, in this case, SMEs, ability to generate cash flow in order to service the interest and principal on the loan. By having a strong cash flow, it demonstrates an SME’s capacity to repay debt and mitigates the probability of default. Thus, this will improve the creditworthiness and credit score of an SME and a business.
Diversify Business Operations
As the old saying goes: “Don’t put all your eggs in one basket”. This is especially important for small businesses these days. As the digital age shorten product life cycles and hasten the rate of change of consumer preferences, small businesses have to think out of the box and diversify to stay relevant. A diversified business can indicate a stable business model and hence improve your company’s creditworthiness. One way of diversifying could be to offer integrated solutions for your consumers so as to meet their further needs.
Have Sound Know Your Client (KYC) Procedures
Having sound KYC procedures are not only important for big firms, but also for SMEs as well. Clients and customers are, after all, the main source of income and revenue for the business. It is thus imperative to take measures to monitor customers’ accounts and business performance on an ongoing basis. In addition, SMEs have to set out very clear payment terms and conditions for their customers so that their cash flow can be healthy as well. As such, having sound KYC procedures indicates stability of the business, which will improve creditworthiness for your business too.
Remember, it’s never too early to improve your business’s creditworthiness. It is obvious how a business’s creditworthiness can help a business’s operations in the long run, so it is pivotal for SMEs to start improving it right at the start.
2016 Business Finance Survey: SMEs, Business British Bank, link