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Discover The Top 5 Ways to Improve Your Startup’s Creditworthiness

Best practices on how to improve creditworthiness

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Starting a business is a big decision. But running a company always proves to be a little more complicated than most entrepreneurs contemplate. Eventually, some startups don’t even make it past the first year.

Unfortunately, the troubles for startups don’t end after a business makes it past the first year. After four or five years, 45 to 50 percent of startups quit.

Several aspects can cause startups to fail, with poor cash flow being among the most critical. A business credit rating can make a big difference in access to financing, which can mean the difference between survival and closure.

What Is Business Creditworthiness?

As the name suggests, a business’s creditworthiness measures how good a business is in its ability to repay debts. Businesses’ creditworthiness is determined by several factors, such as history with lenders and suppliers, type and size of business, debt repayment performance based on the performance of similar businesses, and legal fillings such as bankruptcies, tax liens, and judgment.

Good creditworthiness can help your business in several ways. First, it ensures you will have a better chance of securing financing with lenders. Also, lenders look at the creditworthiness of a business when determining interest rates for loans extended to a business. So, as a new business owner, understand that pushing your credit score a bit higher should be high on your to-do list.

In addition, seeking the assistance of an experienced application development company for startups can be beneficial in streamlining business processes and enhancing productivity. Such a company can help create custom software solutions tailored to your specific needs, providing your startup with a competitive edge and enabling efficient business growth.

Best Practices to Improve Creditworthiness

1. Pay on Time

Ensuring you’re always on time with paying off bills and loans is important for keeping your business in good standing. It’s not just about avoiding late fees or interest charges—this habit actually boosts the image of your business as reliable and trustworthy to lenders. Just think of it as improving your business’s reputation score.

According to Experian, one of the major credit bureaus, payment history is the most crucial factor in determining business credit scores. 

When you’re late on your payments, or worse yet, when you don’t pay at all, it can really mess with how lenders view you. They see this behavior and think you might not be reliable enough to repay their debts. And just like that, your credit score takes a hit. So, keeping up with your payments is vital if you want good business credit scores.

Another good indicator of a business’s payment performance is Dun & Bradstreet’s PAYDEX Score.

dun and bradstreet PAYDEX score
Source: dnb.com

Your PAYDEX score is like a report card for how well you’re doing with paying your bills. A higher score means you’ve been on top of things, always paying off what you owe right on time. This isn’t just good for keeping debt collectors away—lenders and suppliers take notice, too! They’ll see that stellar track record and might offer better deals or lower interest rates because they trust you to pay them back.

Here’s an interesting example. The Federal Reserve Bank of St. Louis has made it clear that how reliable a business is at paying back debt can indirectly sway the interest rates they get on loans and credit lines. So, imagine you’re running your own show–when you consistently pay your bills, it’s like scoring high marks in class; this makes you more attractive to lenders who might offer lower interest rates as a result. 

In the end, paying bills on time dodges unwanted late fees, helps to score sweeter deals from suppliers, boosts their credit ratings, and builds a trustworthy financial reputation.

2. Using Credit Cards to Fund a Startup Is Never a Long-Term Solution

When you hit a dead end in financing your business, it is okay to use your credit cards. However, using a credit card should be a last resort because, in comparison to other types of loans, the interest rates and fees associated with credit card debt can be rather high.

Also, having a credit card for your business can be very tempting. So, if you know you are not good with money management or have a bad spending habit, a business credit card may not be the best option.

But if you still need to use a credit card to fund your startup, you must register your business first. After that, you will need to apply and get approved for a credit card before you can start using it.

Keep in Mind

While credit cards may temporarily provide the funds needed to cover business expenses, they often come with high interest rates and should not be seen as a sustainable option for long-term financing. Misuse can result in mounting business debt and a negative impact on your business’s creditworthiness.

  • Costs Associated with Credit Card Debt: According to a report by NerdWallet, the average interest rate for business credit cards is significantly higher than other types of loans. Therefore, if you rely heavily on credit cards to fund your business, it can lead to higher debt costs.
  • Alternative Funding Options: Considering other funding sources such as term loans, SBA loans, or equity financing could be a healthier, more sustainable way to finance your startup. The SBA’s guide on financing a business can help you explore a range of options and determine what may be a good fit for your startup.

Remember, while credit cards can be a convenient way to cover expenses or manage short-term cash flow issues, they should not be the primary method of financing your startup. It’s important to approach credit card use responsibly and consider other financing options.

3. Use Credit Repair Software

Credit repair software often goes beyond offering features such as dispute handling and progress tracking capabilities. Having solid credit means your business gets seen as trustworthy in the financial world. Plus, if any disputes arise around inaccuracies on your record, having an automated system ready to tackle those issues can save time and stress. In short, credit repair software doesn’t just polish up your score—it makes climbing that financial ladder easier with every rung. 

Many credit repair software, such as Credit Repair Cloud, offers business owners tools to manage and dispute credit report issues. They’re your go-to tool when dealing with credit report mess-ups. Not only does it help you spot the mistakes, but it also lets you shoot off dispute letters in no time.

Credit Repair Cloud

Credit Repair Cloud is offering a free webinar you can register to help you grow a credit repair business, so be sure to check it out.

Using credit repair software streamlines the whole process of fixing your credit score and keeps your money matters on point. No more wading through confusing paperwork or dealing with annoying calls to creditors—this tool handles it all for you. 

Remember, while credit repair software can aid in the process of improving creditworthiness, it is intended to supplement, not replace, good fiscal management and timely payment habits. Always consult a financial adviser before making any major changes to your credit or financial plans.

4. Registering Your Businesses Patents, Trademarks, and Copyright

Registration laws for businesses vary based on the type of business. However, if your business is based around your invention, you may need to do more than meet the statutory registration to ensure that your innovations are secured.

The best way of protecting your innovations includes registering patents and copyrights and trademarking your business’ trademarks. However, the costs of registering a trademark to secure your innovations may be relatively high, so you will need to let a reputable intellectual property law firm handle the registration if you want to save a significant amount.

5. Be Careful With Getting Credit

One way of building your business credit rating is using debts to finance your business and paying it on time. This trick has been used by entrepreneurs seeking to build creditworthiness fast for a long time. However, you must ensure that you use credit only when necessary.

Getting credit for reasons that are not important could result in having a debt that may present challenges to repaying, resulting in a bad record. Applying for credit frequently can result in your request for credit being denied, which could add a blemish to your credit profile. Also, having too many loan applications over a short period can be viewed as a sign of struggling financially.

Conclusion

Now that you know what it takes to improve your business’ creditworthiness, there’s no reason why you should not make every effort to ensure your business survives where others fail.

With a good credit rating, you will have a better chance of securing loans to fund business expansion.

Vaslou is a passionate digital creator and blogger who loves to explore unique paths to generate online income. He’s also a musician, always looking for exciting paths to articulate his inventive spirit in the musical realm. When he’s not at work on his online endeavors, Vasco loves to delve into spiritual realms to become a better version of himself.

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