Is your Business Credit-Ready?
The goal of every business is to thrive and that can be difficult in today’s rocky economic landscape. You need to be able to jump on the opportunities that’ll allow your business to grow and succeed, which often requires an injection of capital to fund the purchase of stock, materials or new plant and equipment. But, if opportunity comes knocking, will you be able to answer?
If your business is new, you may not be thinking about getting business financing just yet, but the day may come when you do.
So what should you be doing to ensure your business is credit-ready?
The five C’s of credit and what they mean for you
Traditionally, bank lenders use the five C’s of credit to work out if the potential borrower can service and pay back a loan.
• Capital: lenders look at borrower’s financial position including assets and liabilities, net worth and liquidity.
• Capacity: can the borrower repay over a suitable period? Lenders may calculate various ratios to show this, such as debt-to-income or servicing ratio incorporating cash flow, revenue, expenses and other outgoings.
• Collateral: type of security (such as vehicles, equipment, property or accounts receivable) the business is providing, along with age, location and attributes of the security.
• Character: what is the business and business owner’s reputation (and credit history)? Lenders may consider factors such as loan repayment history, general savings history, job tenure and credit ratings file.
• Conditions: lenders look at how the borrower will use the money, trading ratios, whether they have security, plus external factors including state of the economy, to calculate loan conditions
Many non-bank lenders don’t require all of the above criteria, depending on the business need, trading history or financial position, however one common requirement applies to all borrowers, regardless of time in business or financial position – credit score.
Unlike a credit report, which is the detail of your credit history to date, a credit score is a number which is derived from the information on an individual’s credit report held by the credit reporting agency when the credit score is requested. It gives the lender a snapshot of how reliable you are as a borrower and usually ranges from 0 – 1200. The higher your credit score, the better your credit profile and the lower a credit risk you are.
There are a number of key contributing factors that are taken into consideration when generating your credit score, including:
• Type of credit providers listed (for example a bank vs a non-traditional ‘payday’ lender)
• Number of credit enquiries and shopping patterns on file
• The age of your credit report. A relatively new file may represent a different level of risk than an older file with only a few enquiries
• Your personal details and ‘stability factors’ such as how long you’ve resided at your current address
• Default information such as overdue or unpaid debts
Your credit score can be the deciding factor between having finance approved or denied, which is why it’s important to keep your credit report healthy and improve your score by:
• Paying your loans and bills on time
• Avoiding ‘shopping around’ for finance to limit the number of credit enquiries made on your file
• Notify all credit and utility providers if you move house or change email address
• Talk to your credit provider if you’re having trouble meeting your repayments
• Keep track of your credit record by requesting a free credit report every year
If you run into trouble and your credit score is adversely affected, don’t give up hope. Speak to your broker about non-bank lender options for borrowers with existing credit defaults or lower than average credit scores. They may charge you a higher interest rate compared to someone with a good credit score, but if the potential benefits derived from securing the loan outweigh the cost of missing out on a big opportunity, it may still make good economic sense.