How to Protect Your Business’s Credit Score During Economic Downturn
Every business has a unique credit score that helps lenders and suppliers determine how reliable they are at repaying debt. Although your business credit score is separate to your personal score, it’s calculated in a similar way.
A strong business credit score can improve your company’s chances of loan approval and help you attract lower interest rates. It can also help you to negotiate better payment terms and attract new customers.
But negative financial activity – like defaults or late payments – will lower your score and this can make it harder to be approved for finance.
Boosting or maintaining your business’s credit score can be especially difficult during times of economic downturn. With many business owners facing debt and cash flow issues at the moment, it’s never been more important to implement financial strategies to protect your operation’s credit score.
Below are some ways to protect your business credit score during this time.
Check your business’s credit score
Around 93% of Aussie businesses have never checked their credit score, yet this should be your first port of call as a business owner.
Your business credit score is a number between 1 and 1,200. It’s calculated based on a number of factors such as your company’s credit information, number of credit enquiries and time in operation. The higher your score, the more “trustworthy” you appear to lenders.
It’s important to understand where your business is sitting financially. If your score is at the higher end of the spectrum, you can focus on maintaining it. If it isn’t quite up to scratch, identify any factors that may be dragging it down.
Free up cash flow
During a recession, it’s important to free up cash wherever possible – every little bit helps. Any extra money saved can be put into an emergency fund or go towards bills and repayments.
Depending on the type and size of your business, below are a few options for boosting your cash flow:
- Cut back on spending. This can include things like software, stationery supplies, training or events. You can always reinstate these expenses once things return to normal. Make sure you’re tracking all expenditure so you can account for where your money is going. Business budgeting apps or software can help if you aren’t comfortable managing it on your own.
- Negotiate with suppliers. Depending on your contract, you may be able to re-negotiate new payment terms with your existing suppliers or creditors. This can help to lower costs in the short term.
- Apply for financing. If your score is already up to scratch and you just want to maintain it, a business loan may be able to tide you over financially and keep things running smoothly.
Assess what you can and can’t pay
Ignoring your bills will only worsen a cash crisis, and may lead to a default on your credit file. If you’re drowning in overdue notices, try to prioritise the most essential payments first. This should typically include tax payments, staff salaries, utility bills and rent.
Be proactive about contacting creditors
If you can’t meet your repayments, be upfront with your bank or lender as soon as possible. Procrastinating will not make the situation go away.
Thousands of businesses are having a hard time at the moment, and your lender or credit provider may have additional hardship measures in place. This may include options like payment deferrals, a reduced interest rate or a loan holiday.
If you’re able to negotiate new repayment terms, make sure you’re across any fine print. Will interest still accrue during this time? What happens at the end of your temporary payment deferral? You want to make sure that you’ve covered all bases so you aren’t caught out down the track.
If you’re doing it tough financially, the most important thing is to keep communication lines open. Suppliers, banks and lenders may be more willing to negotiate if they are notified of your situation in advance. By being proactive, you will protect your business relationships, protect your business and ultimately, protect your business credit score.
Byline author: Bessie Hassan (money expert at Finder).