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Access to business credit can be a lifeline when businesses most need it, providing cash flow for payroll, purchase of goods and services and investment into expansion. For new businesses, establishing credit is even more pertinent for building credibility, accessing finance and the separation of personal and business finances. So, how can companies with limited time in business establish business credit for the first time?
Establishing business credit takes time, it won’t be an overnight process, so be prepared to be patient. Here are a few steps to setting up a solid financial foundation for your business from the start.
Applying for and being approved for credit can help to build your business credit profile, assuming that you’re keeping your commitments to making payments. A business credit card can help you in establishing credit and managing expenses in the early days of business but they often come with high interest rates. If cash flow is tight anyway, It’s also easy to fall into the trap of not paying them off in full and having to take on more high interest debt in order to repay them. This can have an unwanted impact on your business’ credit that is hard to reverse.
As your credit profile strengthens, small business loans are an attractive form of finance that can help build credit further and provide much-needed working capital as you grow a new-start business. Unfortunately for new business owners, small business loans are becoming increasingly hard to come by and main street lenders will often stringently insist on several years’ business history and financial statements plus an above average credit score. In this respect, using loans to build credit rating is a dilemma for many new businesses – they need the loan to become established yet can’t get the loan before being more established.
What startups often have in their favor is a positive accounts receivable position. A solid order book of consistent revenue-generating clients might be considered collateral for accounts receivable financing or factoring. Alternative lenders can extend credit based on the value of your outstanding invoices.
To maximize the benefits of positive accounts receivable when seeking credit, it’s important to;
Ultimately, a factoring company will be interested in your potential for growth as a business, as evidenced by outstanding accounts receivable. Utilizing unpaid invoices to generate cash flow can help a new business to get themselves into a position where a bank will consider them.
While factoring itself doesn’t directly contribute to enhanced credit score, the improved cash flow and credit management associated with it, positively impact a business’ ability to handle other credit sources such as loans and credit cards. Factoring also frees up collateral to be used for other credit, potentially diversifying your credit profile. Since factoring doesn’t involve taking on new debt, it doesn’t directly impact your debt-to-credit ratio; this can be beneficial for your credit utilization, a key factor in determining your credit score.
Access to credit for new businesses can be challenging but it’s not impossible. Lenders are often cautious when providing credit to new businesses due to lack of credit history and track record. Building business credit as a new business is a gradual process that takes consistent financial responsibility. Make sure that you follow our steps above and are diligent in paying bills on time, managing trade credit accounts and maintaining positive relationships with your suppliers. Over time, efforts will contribute to a healthy business credit profile.
If you face challenges in accessing finance through poor or lack of established credit, alternative finance options such as invoice factoring can help bridge the gap until you’re in a stronger position. Consider seeking advice from financial advisors who can provide guidance for your particular situation and as always, reach out to the experienced team at Sallyport to explore your finance options.
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