SMEs: mend credit rating
THINK AHEAD: BE UPFRONT AND HONEST
A good credit rating is worth its weight in gold.
B usiness owners who have experienced financial difficulty and defaulted on loans assume they’ll be dismissed by lenders. This isn’t necessarily true.
1. Inertia isn’t an option
Your credit rating is a sizeable measure of your worth in the eyes of lenders and will affect your ability to sign leases, negotiate new debt and secure finance for assets. However, a close second is someone who may have had some difficulty in the past, but has rectified the situation.
For example, a business owner could help a friend starting their own venture by standing surety for them. The new business may fail and the business owner might be left having to honour the suretyship. If they don’t, they’ll have a judgment against them.
However, if they make arrangements with the bank to pay off the liability and stick to that repayment schedule, there’d be no blemish on their record.
2. Be honest
People often try to hide their past, even putting family and friends in as fronts of the business so questions aren’t raised about their credit history.
Remember, (with a client’s consent), all lenders perform credit checks, conduct searches on court judgments and perform social media checks to vet applicants.
Beforehand, have a frank discussion with the lender and disclose relevant past issues.
If the lender finds anything untoward during their investigations, they’ll likely walk away from future engagements.
3. Have good people
Lenders will also take a critical view of shareholders and board members in the business. If they’re in good standing and have a solid market reputation, this can bolster how lenders rate your risk.
4. Ignorance isn’t a defence
Some people genuinely don’t know they have a black mark on their credit history. Run a credit check before approaching a lender. Dealing with your past and taking remedial action to clear your name will significantly improve your chances of accessing future funding.
5. Recession-proof your business now
Planning for bad times is the best way to ensure you don’t find yourself clawing your way back to good standing. Recession-proof your businesses and ensure you’re cash positive.
6. Stay ahead of compliance
If necessary, find professionals who can help you stay on the right side of tax and legal requirements. They can also review your contracts and help you re-negotiate contracts to benefit from better terms. Ensuring you don’t have bloated operating expenses and that you have adequate overdraft facilities in place for the unexpected is sensible.
7. Bank on hikes
Business owners should plan now for interest rate increases. The 25-basis point hike in November now brings the repo rate to 6.75%. We can bank on a further series of small increases over the next few quarters.
Reducing your risk could mean fixing rates, taking forward cover if you’re an importer, or considering cap and collars to set upper and lower limits to interest rates charged.