Keep a close eye on your credit score to help you reach your business goals
Starting your own business is brave and can be quite difficult, especially if you need funding. Not many people can approach investors or tap into savings to fund their passions. This means they must turn to banks. But getting credit from a bank can be difficult, especially if you’re not sure how to go about it or how to set up your business’s credit score.
In our personal finances, whether we get credit or not is largely dependent on our managing our credit diligently. Making payments on time and not burdening our income by taking on more credit than we can afford leads to a good credit score, and gives us access to credit facilities should we need them down the line.
Much like you have a credit score as an individual, businesses also have credit scores. To start building your business’s score, use credit facilities to make running your business easier. Getting a cellphone contract or telephone line for your business is something you can do without taking on unnecessary credit.
When you build your credit score, do not make the mistake of mixing business finances with personal finances. That is, don’t take on credit using your business name when the benefit is directly to you and not your business. This may seem obvious, but many people blur the lines and end up using business funds for personal spending, which hurts the business in the long run.
Don’t neglect one credit score and focus only on the other. Unfortunately, when you’re still running a one-man show, your personal credit history matters just as much as your business’s credit history. It tells banks and suppliers they can trust you to make payments on time.
More important, you must stick to payment arrangements — both personal and business. When running a business, the likelihood of running into a dry patch is high — especially if the economy is sluggish and consumers are paying attention to where their coins go. You want to keep credit taps open should customer payments dry up.
There are certain requirements banks set for people who want to get a loan, an overdraft facility or a credit card. You must study and compare products across banks.
Some banks require you to have a minimum annual turnover. FNB requires businesses to have a turnover of R500 000 a year to apply for a loan.
Nedbank has a product called “start-up loan” tailored specifically for small businesses, where the minimum loan is R100 000 and projected annual turnover is R7.5-million.
Absa has a variety of financial products that cater for different business needs, from working capital loans to loans for small to medium enterprises that may not qualify for what it calls a “conventional loan”.
Standard Bank has products that range from revolving business loans to debtor finance, which allows you to access some of the money owed to you by your customers should they not make timeous payment.
These examples are not exhaustive, and you must find a product that suits your specific business needs.
If you are granted credit, do not forget to borrow responsibly. It’s tempting to spend when it seems like there’s lots of it. Without discipline, you can lose focus and use money for things that benefit neither the business, nor you, in the long run.
Borrowing responsibly is also about the kind of credit you use. Don’t take on longterm credit to plug short-term shortfalls. Don’t take on more credit than you need, or more than you can afford to pay back.
This is crucial if you’re aware that the time period between your getting those funds and starting to see tangible returns on that capital may be longer than the period you have until your first repayments are due.