As an SME, it is critical to begin thinking about your business’ credit rating at the earliest, especially if you want to be eligible for easy loans and competitive rates.
Many businesses make the common mistake of believing their personal credit rating is the same as their business. Yes, you probably started your business based on your personal credit rating and history. However, as the business grows, its liabilities and reputation grow too. And that is where business credit rating comes into the picture.
Not many individuals know that there is something known as a business credit report. Only recently have people become aware of terms like CIBIL Score, Credit Score, and Company Credit Rating.
Quite simply put, this is a snapshot of a company’s complete financial history. It includes details of current loans, applications, and defaulted loans. It also makes a mention if a company has ever acted as a financial guarantor.
A credit report is crucial because it is the one document that lenders rely on to get an accurate picture of a company’s financial health and worthiness.
Here are 5 reasons you must consider getting your company’s credit rating.
#1 For Small Business Financing
Getting small business loans depends largely upon your credit rating. Companies with a better financial history are looked upon more favorably.
Also, the higher your credit rating, the better the purchase terms when dealing with suppliers and vendors. In the absence of a business credit rating, you might get minimum or no credit window, and could be asked to pay in cash. Worst case scenario, you might have to put your personal credit rating as a bargaining chip, not something we’d advise.
#2 When Applying for Tenders or Contracts
Many government agencies or larger organizations will check your business credit rating before even allowing you to register as a contractor. A strong credit rating shows that you are a reliable supplier who has no financial ghosts in the closet.
#3 Keeping Business and Personal Expenses Separate
Like we mentioned earlier, using your personal credit at the start of the business is fine. However, as your business grows, you need to maintain a distinct line of credit for your business and personal expenses. Also, any defaults on small business loans will not have repercussions on your personal standing.
#4 While Scouting for Potential Business Partners
If you are in the market looking for partnerships or strategic liaisons, chances are the potential business partner will look up your history to check for stability and trustworthiness. It is thus critical to not just maintain a credit rating but also to periodically review it.
#5 Increased Value of Company
A company is as strong as its reputation is. This couldn’t be truer than of a credit rating. Moreover, if you ever decide to sell your business, the high credit score that you have garnered over years is fully transferable to the new employee, giving you an edge when selling your business.
Understand how banks and lenders evaluate (https://hbr.org/2014/09/use-data-to-fix-the-small-business-lending-gap) a business’ credit health.