A clean, healthy credit file is fundamental to small business success. Maintaining an unblemished credit history is a significant advantage when applying for finance, as lenders will determine your ability to repay the loan based partly on the information in your credit report. Here are four good credit practices you should keep.
Establish trade credit
Small businesses rely heavily on trade credit, that is, the provision of goods and services upfront in return for payment at a later date. This is essential to building your business credit history as it demonstrates that you are able to manage cash flow and pay vendors. It can also give you better terms, bulk discounts and interest rates on these products and services. However, when doing so you should keep the following in mind:
- Purchase from reliable and legitimate vendors
- Take advantage of the vendors' credit terms (the standard is 30 days)
- Start with a small line of credit to determine your ability to service the debt
- Don't borrow more than you actually need
Pay vendors on time
Once you've established a certain amount of business credit, the next step is to ensure that you pay it off on time. Consider this: you wouldn't like it if your customers paid you late, so in turn make sure you pay your suppliers by the due date. A failure to pay your bills can result in defaults, adverse information on your credit report and damage the relationship you have with your suppliers. Some tips for paying on time include the following:
- Set reminders in your diary or calendar five days before payment is due
- Establish a separate bank account that's only used to pay bills and receive payment
- Separate this account from your personal accounts
- Maintain a spreadsheet of all your bills and their due dates
- Calculate the amount of money needed to pay your bills and set that money aside
- You can also consider automatic bill payment
Don't overspend on your credit card
In addition to trade credit, many businesses also have a credit card as it has the benefits of being cheaper to use than cheques, can be allocated to employees for corporate use and lists all your purchases in your monthly statement.
Credit cards are often used for online shopping, which is an easy, hassle-free and often cheaper way of obtaining equipment or raw materials, rather than going through the process of applying for trade credit. But much like personal credit cards, it can be easy to overspend on your business credit card, which can result in overlimit fees and a huge debt.
Avoid overspending by preparing an itemised budget, and sticking to it. You should also consider reducing the number of credit cards you have allocated to employees.
Check your credit report regularly
Last but not least, obtain a copy of your credit report regularly to check if you have any negative information recorded. If any, you can take measures to rectify the issue before applying for finance. Lenders often view your credit report prior to extending you finance, but if your credit report is clean, you're more likely to obtain a higher loan with better terms.