The importance of building business credit cannot be overlooked when you are running a business, because it is a prerequisite when you plan to get a business loan to grow your business in the long term. Unless you are rich enough to finance your business on your own, you will probably need to seek financing one day to bring your business to greater heights.
Just like you have a personal credit rating, your business also has a credit rating.
Having a good business credit profile is what lenders look at when deciding whether to approve the business loan to you, as your business credit rating reflects how well you are able to handle and manage your finances.
Your business credit also determines how much your company is eligible to borrow, and at what interest rate. A good credit rating means that you are able to get a greater amount of loan at a lower interest rate for Business Banking Facilities in Singapore. Adversely, having a poor credit rating limits your financing options as banks usually have strict lending criteria, which means you will have to seek alternative fundings that are at a much higher interest rate.
How To Build Business Credit?
One point to note about the irony of business financing is that the best time to apply for a business loan is when you don’t need it.
Understanding the importance and establishing a strong business credit profile early helps in your immediate and future business plans. A good business credit profile always appeals to lenders to offer a business loan to you and helps with your business expansion plans.
Building business credit takes some planning and forethought, and it does not happen overnight. Here are 5 ways to get started.
- Keep Track of Your Personal Credit Rating
The owner of the business is the biggest representation of the company itself. As a business owner, you reflect how your business is run and how finances are managed.
Banks and financial institutions always require the business owner(s) or director(s) to act as a Personal Guarantee when they approve the business loan, as this signals a commitment by the guarantor(s) that they are committed to the loan obligations.
As such, the Credit Bureau Report is one of the key factors that banks look at in determining loan approval. Your personal credit report can be retrieved from the Credit Bureau of Singapore (CBS), which is authorized by the Monetary Authority of Singapore (MAS) to issue credit reports and credit scores.
Your financial history and a comprehensive report detailing all the loans you have taken, your repayment record, and even the number and type of inquiries you have made to lenders will be tracked by CBS and made available to your potential lenders. Hence, your credit report serves as an indicator to potential lenders on the likelihood of you repaying your debts on time.
By building your personal credit profile, you will also be able to boost your business credit.
- Apply For a Credit Before You Need It
As most banks usually offer bigger loan sizes and better loan terms for businesses that have shown business track record and have been operating for at least two years, another way to build your business credit is to start by applying for a small business loan with banks that offer startup loans. Banks have loan programs for new startups, such as OCBC Business First Loan or UOB SME Loan, whereby startups can start applying after their business has been registered for at least 6 months or 12 months respectively.
Applying for a business credit card is another way of building business credit as well. Use the credit card and make sure that you make timely payments.
The point of getting a small business loan or a business credit card even if you do not need it is to show your business capability in making repayments on time so that when in time to come you need a bigger business loan, banks will be able to look at your credit repayment history and gauge your business creditworthiness.
However, do note that you should not apply for too many credit cards at one time as each time you apply, lenders need to assess your credit report. Each time a lender reviews your credit report, it will be reflected, and this will bring down your credit score as it may be an indication that you are in financial difficulties hence trying to get more credit by applying for multiple credit cards.
- Use Your Credit Cards Wisely
It is important that you do not spend beyond the credit limit that you have been given. Ensure that your debt remains low. Even if you are not using the credit card, keep it, because your credit is calculated based on how much is available for you to use versus how much you have actually used.
A good gauge would be to keep your credit utilization below 50%. This means that if your total credit available is S$100,000, the total amount that has been used should not exceed S$50,000.
If you exceed the credit limit, potential lenders see it as an indication that you may be having a financial crisis and deem you as a riskier borrower. In case you have exceeded the 50% gauge or the credit limit, it is advisable that you pay off the excess amount first so that it will bring up your credit rating over time, before you approach any bank for a business loan.
- Pay All Your Bills On Time
The best thing you can do is to pay all your bills on time as it helps to build a positive payment history by showing that you are able to meet your financial obligations. This enables you to maintain strong business credit as it reflects good business management practices and responsibility.
In addition, instead of paying the minimum amount for your business and personal credit cards, you should pay off the entire amount so that you do not incur unnecessary and high-interest fees. Use your credit card as a payment instrument, and avoid accumulating large amounts of credit card debt.
- Forge Relationships With More Than One Lender
Last but not least, as different banks have different lending criteria and risk preferences that may change over time, it is noteworthy that by forging relationships with more than one lender, it gives you a wider choice when the time comes for you to start approaching the various banks for a business loan.
Furthermore, should you require a bigger business loan quantum in the future, you can also approach a few banks at the same time to raise the amount you require.
New startups can start with business banking facilities such as a bank account opening. Banks such as DBS provide the DBS Digital Account which helps startups to keep their banking costs low by allowing no minimum balance requirement hence no fall-below fees.
Understanding the need to build good business credit and starting on it early helps when you eventually need to seek financing to grow your business. Building business credit does not happen overnight, but by bearing in mind the above-mentioned ways and having healthy financial habits, it will pay off in the long run. Do not let a poor business credit profile deter you from reaching your dreams of building your business empire.
Read also: Understanding Your Credit Report From Credit Bureau Singapore
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