Small businesses need finance to grow and prosper. However obtaining finance is often a long and frustrating process, poorly understood by many who need it.
And so what are main factors that govern whether a business can obtain the finance it needs?
Some of these are out of a business’s control. These include the strength of the overall economy – businesses as whole have found it harder to get finance in the past few years than in 2007, for example – and the age of a business. All things being equal a startup will find it harder than a mature business to access funds.
But there are several things that a business owner can do. We look at three key ways to maximize a business’s chances of obtaining business funding:
Pay Bills On Time (or even early)
The main, but not sole, credit rating for business is the Paydex score run by Dun & Bradstreet.
The Paydex calculation is a little complex, but in essence it measures how timely a business pays its bills.
A score of 80 signifies that on average it pays on time; a lower score means it is late; a bigger score suggests it is often early. Hence it is vital that a business pays bills on time, or even early, to maximize this score.
This may be against alternative cash management related advice – pay bills as late as possible to maximize cash flow – but it will assist in the long run.
Have as much credit history reported to credit agencies as possible
The above Paydex score – and other similar scoring systems – rely on lenders/vendors reporting payments to credit agencies.
Make sure you have several lines of credit and vendor accounts which report to the main agencies – especially Dun & Bradstreet – as possible.
This credit history will not only allow the business to qualify for a Paydex score – 5 reportable instances are required – but in themselves will increase your credibility with prospective lenders.
Have great personal credit
Whilst there is no formal link between the business credit – or business credit scores – most lenders will study a small business owner’s personal credit with a business application.
This is often related to a lender’s requirement of a personal guarantee from the owner, but is also seen as a key indicator of business creditworthiness too.
A small business with a great credit rating and history, but with an owner with poor credit, will still struggle to obtain funding.
Follow these tips and you’ll maximize your business’s creditworthiness, and hence its chances for obtaining a loan or other credit. Ignore them and you may struggle in the current economic climate.
Chris Young runs Epsilon Business Credit, devoted to small business finance. He has 20 years financial experience in the online and technology space, lately as a CFO, and hence has a particular interest in financing new technology and other start ups.
Contact: c.young [at] epsilonbusinesscredit.com