A Credit Crash Course for Small Businesses

A strong credit rating is fundamental to small business success. For lenders it is a critical factor in determining the type and price of credit products available to you.  These decisions will determine whether credit helps, ultimately helps or hinders your business.

Here are some simple steps to assist in obtaining and leveraging business credit more effectively.

Establishing good credit starts now.

The sooner a business begins to establish credit, the better. Many business owners believe that establishing credit is a natural result of doing business; however this is a common misconception. The best way to begin is to simply be proactive. Ensuring your personal finances are in order is a good starting point. That way if your business needs some form of financial aid to get off the ground, your strong personal credit rating will improve the chances of gaining a small business loan. The next step is to establish a line of business credit. A good way of doing this is to purchase a vehicle or some other type of hire purchase asset. Importantly, you must then ensure all monthly repayments are made through a business account.

Keep your business autonomous.

Small businesses have a high risk of failure, particularly in their early years. Therefore the next few steps are crucial in creating a sturdy platform from which to build your business.

Once you have leveraged your personal credit and started work on developing your credit rating, it is important to then establish your business as a separate entity. You can do this by applying for an ABN (Australian Business Number) or ACN (Australian Company Number). Formerly registering your business name is also imperative. In addition, ensure you register your business with major credit bureaus such as Dun & Bradstreet by applying for a D-U-N-S number. This number will set your business apart and help facilitate proper credit identification.

If you run a home-based business, it's important to look credible to prospective lenders. You can do this by establishing a bank account for business purposes only. As a result lenders will be able to form a clearer picture about the business entity and the application process will be considerably quicker. Simple steps such as this can become powerful tools in driving your business.

Keep track of your profile.

Your credit profile will require regular monitoring. It's never safe to assume that all of your frequent business dealings are being reported accurately and on a regular basis. Some companies can be slow to report. Therefore it is essential to ask a company about its credit reporting policy before conducting business with them. This will ensure that all of your transactions are included on your credit profile.

Work to establish lines of credit.

It's always good practice to establish a positive rapport with your vendors early on. When you feel comfortable, ask them for a small line of credit. It should be an amount you are confident you can pay off on time, regardless of your cash flow. This will not only give your vendor confidence in your ability to conduct business but will also help you build your credit rating. It may also result in better terms and interest rates on the products and services that you rely on. For example, when you're buying office supplies and equipment, don't write a cheque or use your business credit card. Instead, it's a good idea to patronise the likes of Officeworks and take advantage of their 30 day accounts.

Keep your debt reasonable.

Once you've obtained a certain amount of business credit, avoid the urge to borrow more money than you actually need. Instead, focus on the money that you may have trapped in sales. For example, you may find that you're waiting lengthy periods of time for your customers to make payments on their accounts. This forms part of improving your cash flow. In circumstances where this happens frequently, you should reassess your business structure. Perhaps it will be effective for you to hire someone to manage your accounts. Or perhaps the business may benefit from having sales staff out on the road - actively seeking sales but also reminding customers of their due accounts.

Unnecessary debts can make you a credit risk in the eyes of future lenders. Therefore, borrowing money should be limited to seizing concrete opportunities for growth and expansion. New business owners may be able to obtain secured lines of credit with certain lending institutions; however extreme caution should be exercised. Secured loans require collateral, namely your business assets.

Always pay on time.

Although this seems like an obvious step, many businesses don't fall into the habit of paying their bills on time. Consistently paying your creditors on time is an extremely important business practice to create a positive credit rating. Credit bureaus such as Dun & Bradstreet operate initiatives like the D&B Trade Exchange Program. The program tracks more than 10 million accounts receivable every year in Australia. Both favourable and non-favourable payments are reported through the unique program, the only one of its kind in Australia. This complimentary service is designed to assist businesses in reducing credit risk, improving debt collection methods and productivity.

Obtaining a DUNS number.

Businesses with strong credit ratings as well as those with a high risk of defaulting can be identified through a D-U-N-S. Therefore it is important for your business to apply for a D-U-N-S number. With a proven positive credit rating, you will almost immediately increase your chances of obtaining small business loans, lines of credit and gain premiums for insurance. Additionally you'll be viewed as financially sound by potential customers. A reliable reputation amongst creditors is the foundation of a successful business. It can prove to be an extremely valuable asset for you in the long run.

Apply for your D-U-N-S number by filling in the D&B DUNS Number Request Form >>

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