The Small Business Entrepreneur’s Plan for Raising Creditworthiness

As a small business owner, you may know that there are many factors that can influence your business’s success—with one of the most important being your creditworthiness. Essentially, creditworthiness refers to an assessment of your business’s ability to successfully repay its debts and meet its financial obligations. A business may be perceived as creditworthy because of its financial health and financial management approach, which can in turn make it more viable to invest in or lend money to in the form of a business loan.

Apart from being critical in your prospects for small business banking loans, for example the kind offered by the Philippines’ Maya Business, your creditworthiness influences various aspects of your business operations, including vendor relationships, leasing agreements, and even potential partnerships or acquisitions. You’ll want to work on your creditworthiness to improve both your business’s financial stability and its future growth opportunities. 

Below is a plan for small business entrepreneurs that want to raise their company’s creditworthiness. If you’re in this position, here are some strategies you can implement to become more creditworthy in the eyes of potential investors and creditors:

1) Register Your Business

The first step towards raising your business’s creditworthiness is to register it formally and to establish it as a separate legal entity, distinct from your personal finances. Business registration is also crucial for demonstrating legitimacy and credibility to lenders, suppliers, and potential partners or investors.

Expect for business registration processes and requirements to vary per size or type of business. In the case of sole proprietorships in the Philippines, entrepreneurs are required to register with the Department of Trade and Industry (DTI). This process involves securing a Certificate of Business Name Registration, which legitimizes your business name and provides you with exclusive rights to use it in your trade or business transactions.

For partnerships and corporations, registration with the Securities and Exchange Commission (SEC) is necessary. This entails submitting various documents, including articles of partnership or incorporation, bylaws, and other relevant paperwork as prescribed by the agency. Upon approval, you’ll receive a Certificate of Registration, affirming your business’s legal existence and enabling you to conduct operations under the registered name. Even if it’s tedious, business registration will go a long way in demonstrating your overall creditworthiness and your seriousness in your industry.

2) Obtain a Separate Credit Card for the Business

Maintaining a clear separation between your personal and business finances is essential for effective financial management and credit building. A dedicated business credit card will streamline expense tracking and accounting as well as strengthen your business’s overall credit profile.

When selecting a business credit card for your company, consider factors such as rewards programs, introductory offers, annual fees, and interest rates. This way, you can get the most out of your credit card and actually benefit from the financial perks that come with it.

3) Use Credit Lines Responsibly

Access to credit lines can be a valuable resource for small businesses, as credit lines can provide flexibility and financial support when needed. However, you’ll want to use your available credit lines responsibly to avoid excessive debt and maintain a positive credit profile.

Borrow only the amount necessary to fund essential business expenses or investments. Avoid borrowing more than you can comfortably repay, as excessive debt can strain your finances and negatively impact your creditworthiness.

4) Maintain a Good Credit History

Your business’s credit history serves as a track record of its financial responsibility and reliability in repaying debts. Potential lenders and creditors will closely assess your credit history to gauge the level of risk associated with extending credit to your business.

To maintain a positive credit history, prioritize making timely payments on all financial obligations, including loans, credit cards, and vendor invoices. Also be conscientious about reviewing your business credit report to ensure accuracy in your records and address any discrepancies promptly.

5) Manage Your Debts Effectively

While debt can be a valuable tool for financing business growth and expansion, it’s essential to manage it responsibly to avoid excessive financial strain and potential credit issues. Evaluate your business’s debt obligations and develop a comprehensive repayment plan that aligns with your cash flow and financial objectives. You can also consider consolidating high-interest debts or negotiating with creditors to restructure repayment terms on your existing loans. 

6) Keep Your Credit Utilization Low

You can also raise your business’s creditworthiness by keeping credit utilization at a minimum. Credit utilization is the ratio of your outstanding credit balances to your available credit limits, which significantly impacts your business’s creditworthiness. 

High credit utilization can communicate financial instability and may deter lenders from extending additional credit to you. It’s best to keep your credit utilization below 30 percent across all credit accounts, including credit cards, lines of credit, and other revolving accounts.

In addition, regularly monitor your credit utilization and take proactive steps to pay down balances or increase credit limits so that you can maintain a healthy credit utilization ratio.

7) Make Prudent Financial Decisions

Aside from taking proactive steps like the ones listed above, remember that sound financial decision-making is a core part of building your business’s creditworthiness over time. Develop and adhere to a realistic budget that accounts for operating expenses, debt obligations, and savings goals, and stick to it as much as possible.

Practice disciplined cash flow management to ensure that sufficient funds are available to meet your financial obligations and to capitalize on growth opportunities that may pop up soon. Don’t hesitate to seek out the advice of accountants, financial advisors, or business consultants, as their insights and guidance could help you navigate complex financial decisions directly tied to your creditworthiness.

Your effort to improve your small business’s creditworthiness will be an ongoing process that requires diligence and regular practice of your financial housekeeping skills. But the rewards in terms of your financial stability and opportunities for expansion will be well worth the effort.

Try the plan detailed above to build and maintain your creditworthiness, and you may be able to tap into financial opportunities that will truly allow your small business to take off.

This page was last updated on May 8, 2024.

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