The establishment of a new ‘taskforce’ charged with improving the availability of credit for SMEs was welcome news this week.
This group will look at the factors holding back business lending, with a view to increasing the options available to SMEs.
But, while there are signs that credit conditions may be slowly improving, it remains difficult for many businesses to secure credit. Your credit profile is one of the most important factors considered by potential lenders. If you are to stand a chance of securing some of the relatively little business funding that is available, you must make sure that your credit profile is as healthy as possible.
1. Pay on time
Late payment is one of the most important factors considered by potential creditors. If your business frequently misses payment deadlines, you will be severely damaging your credit profile.
It is vital that you have sufficient cashflow to service your debts and pay your bills on time. If you are struggling to do this you either need to reduce your overheads, or look again at your financial planning. An accurate, comprehensive cashflow projection should give you a good idea of what you can afford to pay.
2. Sort your personal finances
If yours is a small business, or if you are yet to file company accounts, potential lenders are likely to look at your personal credit history when determining whether or not to lend money.
It is therefore important that you get your own personal finances in order. This means paying your bills on time, minimising the number of credit lines you have open, and ensuring that you do not appear on the Register of county court judgements.
3. Minimise debt financing
Before coming to a decision, potential lenders will look at the capital structure of your business. They will be particularly concerned with the degree to which you rely on credit to finance your venture.
If your business uses a lot of debt financing (either as a proportion of your total balance sheet or in comparison to your competitors) you will be a significantly less appealing prospect to new creditors. So, where possible, you should keep your borrowing to a minimum.
4. File accounts on time
If your business is incorporated at Companies House, many lenders will refuse to extend credit unless you have filed accounts. Indeed, this is often the primary means by which lenders gather information.
Late filing of accounts is often deemed to be a sign of financial difficulty. As such, it is important that you stick to all relevant Companies House deadlines.
5. Have information to hand
If yours is not an incorporated business, you should be ready for lenders to ask for more information about your financial affairs. They may, for example, ask you to provide interim accounts. Banks will almost certainly ask to see cashflow and profit and loss forecasts.
You should ensure that you have this information to hand in advance of making any application to a lender.
6. Develop your own credit control
Late payment is one of the most pressing problems facing every small business. You cannot expect to be able to pay your own bills on time if your customers are late with theirs. So, it is vital that you develop your own credit control procedures.
Make sure that customers and clients are made aware of your payment terms, and that you chase late payers as a matter of urgency. You might also wish to consider checking the credit profiles of potential clients before agreeing to do business.
7. Check your credit profile
Finally, it is vital that you understand how potential lenders see your business. This means that you should regularly check your own credit profile.
There is a range of credit reference agencies that may hold data on your business. These include Experian and Equifax. You can check your credit profile with these agencies very cheaply – and this will allow you to quickly identify areas for improvement.