It is not commonly known that your personal credit score can affect your ability to secure a business loan as well as other forms of business financing. This is especially true for small businesses that employ less than 20 people. Even if you can secure credit you may be required to pay a higher interest rate due the perceived higher risk or have other obligations placed upon you.
So how does your personal credit impact your business and what can you do about it?
What is a personal credit score?
Your personal credit score relates back to the very first day you applied for credit. For some this may be when you applied for a car loan, moved into an apartment or even got your first mobile phone plan. It should be noted that changes were implemented on 12 March 2014 that increased the information available about your credit history– including whether you have successfully met your consumer credit payment obligations – ie credit used for personal, family or household purposes.
Your credit score is an indicator of how well you handle money and the ability and likelihood of you repaying any debts you have. A low credit score may be an indication that you do not handle your money well and that you are a high risk when it comes to lending – whether for you personally or for your business.
How does your personal credit score impact your business?
It is not just the bank you have to worry about when you have a low personal credit score. Your suppliers may decide not to extend credit to you when they provide goods. Alternatively you may be required to pay for the goods within 7 days – instead of more generous credit terms when you have a good personal credit score. This can have an enormous impact on the cash flow of your business.
The interest rate you pay for any loans from financial institutions may also be higher than people with better personal credit scores. You may even end up missing out on work – especially from large companies or the government, who may check your financial history before deciding to award a contract.
What can I do to improve my credit score?
It is important to remember that you will have both a business credit score and a personal credit score. This means you need to work on both. Assuming you have a poor personal credit score and you have just started your business, it will be easier to establish a good business credit score rather than trying to improve your poor personal credit score. This is because it can be hard to improve a credit score and can take up to 10 years.
Some of the ways you can get a good business credit score include:
- Paying your bills (including suppliers) before or by the due date;
- Keeping your personal and business expenses separate. This includes having separate bank accounts and credit cards
- Checking your business credit score from time to time.
If you have a personal credit score that is low then it is worthwhile to check to see if you have been a victim of identity theft. If that is not the case, you need to start paying your before or by the due date. It is also a good idea to start paying down any outstanding credit card balances
Why is good cashflow management important in getting a good business credit score?
It is easy to say that the best way to get and maintain a good business credit score is to pay your bills on time. However, to do this you need to manage your cashflow so that you have the funds available to pay your bills when they are due. This means making sure your customers pay your invoices on time – and if they do not that you chase them up quickly.
That is where Brodie Credit Control Solutions (“BCCS”), the consulting arm of Brodie Collection Services can help. We can help you get your debtors under control. We can help with trade terms, debt collection methodology improvements, customised commercial credit template forms and assessing the risk of doing business with a new customer
Brodie Credit Control Solutions provide reliable risk assessment solutions for small and medium businesses – including customised commercial credit application forms. Visit www.brodiecreditcontrolsolutions.com.au to find out more about the credit control solutions that are offered by Brodie Credit Control Solutions or call (03) 9889 9977.
This information provides a general summary only and is not intended to provide specific advice for your individual circumstances. It is not a substitute for professional advice and should not be relied upon as such.