Every small business needs ample credit in order to ensure smooth functioning and to fund future growth. In order to avail such funds, it is important to have excellent credit rating that makes it easier to get loans and opens new lines of credit at competitive terms.
This is why it is necessary for every business owner to understand the components lenders consider to establish your creditworthiness and how you can improve it.
What is creditworthiness?
Creditworthiness is used to determine how likely you are to meet your loan obligations. This is what lenders evaluate before they approve your application for a new loan or credit card.
Various factors go into determining your creditworthiness including credit score, repayment history, and debt to income ratio. It depends on how well you have handled your financial obligations until that point and whether you have delayed EMI payments or defaulted on a previous loan, all of which affects your overall creditworthiness.
Therefore, improving your creditworthiness is very crucial because it determines whether you or not you will get a new loan. Lenders are also willing to offer loans on better terms depending on your creditworthiness.
How can you improve your creditworthiness?
Here are six steps you can take to manage your finances well and improve your creditworthiness.
Establish a good credit history
One of the key factors in ensuring creditworthiness is to have a good credit history, which translates into a high credit score.
To do this, you must avoid missing EMI payments, incurring a high level of debt, and making too many loan applications within a short period. Such instances indicate financial mismanagement and may negatively impact your credit score.
Work With Vendors Who Report to Credit Bureaus
Working with vendors who report payments to credit bureaus is a great way to build your creditworthiness. Also, working with multiple vendors rather working with one source helps reduce risk as it encourages competitive pricing. In case, an issue regarding payments does arise with a vendor, your creditworthiness does not take a big hit since it can be balanced out with your positive payments to other vendors.
Pay off All Debts Timely
Paying all your debts on time indicates financial discipline and will positively impact your credit score. It is the biggest component in the calculation of the credit score. Missing repayments will lead to a reduction in credit limit and may also attract penalties, which will add to your financial woes.
Decrease Your Credit Utilisation Ratio
Credit utilisation ratio indicates the usage of revolving credit compared to the sanctioned credit limit. Keeping the credit utilisation ratio below 30% helps improve your creditworthiness as it indicates a lower dependence on credit.
You can reduce your credit utilization ratio by opening a new line of credit, decreasing spending on credit, and paying-off credit balance.
Maintain a Good Cash Flow
The ability to maintain a positive cash flow is crucial for financial success in the long run. Moreover, businesses that practice good cash management can continue to prosper and survive even in lean periods.
Maintaining a steady cash flow helps in covering all regular payments, which is a major factor in ensuring a high credit rating. Further, most of the financial institutions prefer to lend money on good cash flow rather against collateral.
Check Your Credit Report Periodically
Checking your credit report at regular intervals helps you know where you stand and monitor your progress. This is an important step in rebuilding and maintaining your creditworthiness as you can manage and plan your credit better, which is essential for being financial stable. This also helps in detecting any discrepancies or inaccurate information in the report that you can be corrected to ensure all the data is accurate.
Establishing creditworthiness is crucial in order to get loans at the right time to make sure you have ample resources to make the most of any opportunity that comes your way.
Also, maintaining creditworthiness imparts a sense of financial responsibility, which helps in realising financial goals and ensuring the growth of your business. Remember, improving creditworthiness is not an overnight process, but takes months of practicing financial discipline for positive results to show.