Is your business bankable? Or, to a more specific point, is your business creditworthy?
Bankable vs Creditworthy
If you’re a business owner, it’s more than likely that you’ve either been asked or considered the above questions as you’ve examined your operations. Small businesses, doubly so. And while the terms ‘bankable’ and ‘creditworthy’ are sometimes used interchangeably, they’re meant to co-exist in a much broader perspective. A bankable business has enough profits, assets and liquidity to qualify for, and cover a commercial loan. Its creditworthiness, however, is the foundation upon which that bankability is built.
Similar to the credit score that we build as individuals, businesses have their own credit obligations to meet. Having good business credit positions your company as a reputable client and sets the stage for favorable discussions with your bank. Additionally, it can lend more flexibility with regards to vendor payment terms and prepayment options. Did you know that credit terms and interest rates are calculated based on your business’ credit score? Having a negative credit history, or lacking one altogether, can be of detriment to your business in the long run, especially where funding is concerned.
Creditworthiness is ultimately a measure of value. As I mentioned in my Cash Flow blog, for example, “Putting processes in place that effectively monitor and track your cash flow, and the environment that affects it, will allow you to direct your energies to other areas of the business. Having them be clear, measurable and autonomous where possible will provide your business with a solid foundation for short-term growth and long-term sustainability.”
Ask yourself – Are you paying your bills on time? How often are you using your business credit cards? Do you have a strong credit history over, at minimum, three years or is your business newly established? How often are you applying for credit?
Building a Positive Credit Score
Those questions provide the premise of your credit score and how much risk your business constitutes. As for building that credit, and keeping it positive, here’s some advice on what you can do:
On the Financial Side
In my Commingling blog, I talked about setting up separate bank accounts and becoming a separate business entity. The former protects your personal assets, while the latter provides you with an additional layer of credibility. Ignoring either of these and blurring the lines between your personal and business finances, creates barriers for building credit as a separate entity. Without that distinction, you may find yourself being denied services by your bank, among other complications.
Opening a business credit card is another, simple way to accumulate good credit overtime, once payments are made in a timely manner. Your day-to-day operations will require certain recurring or one-off payments and purchases that your card can cover. Usage should be monitored; in other words, don’t spend money you don’t have and ensure that you’re not frequently expending your card’s limit.
No matter your industry, chances are you have worked with a variety of third-party vendors, some of whom provided you with trade credit. Maintaining a reliable accounts payable relationship with them validates your business and is another pragmatic step towards upholding positive credit.
On the Qualitative Side
There are many other factors that can contribute to your business’ overall credit. Having a phone number solely for your business or documenting changes to your staff or even changing locations, just to name a few. These might seem negligible when thinking about creditworthiness, but every moving part of your business does count.
In my next blog I’ll look at the specifics of bankability and in-depth borrowing guidelines that your business should have at the ready when approaching a bank for a loan. Until then, please feel free to let me know your thoughts in the comments below.