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Beyond Numbers: Six Hidden Factors That Make A Business Creditworthy

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Banks evaluate the credit scores of businesses and ventures to assess their creditworthiness. This lets them determine whether or not the business can fulfill its financial obligations well.

July 21, 2023
Author: NCH

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However, numbers alone aren’t enough to measure the financial health of a business. Besides credit scores, lenders also look at other important factors like cash flow, business plans, and market trends. They use these indicators to examine and understand the financial wellness of the business. 

If you want to improve your small business’ creditworthiness, you’ve come to the right place. In this blog, we’ll discuss what being creditworthy means and explore the lesser-known factors creditors look for in businesses.

What Does Creditworthiness Mean?

Creditworthiness measures how trustworthy and reliable a business is when borrowing money. It tells creditors the probability of the business to pay off their debts on time. 

If your business is creditworthy, it means you know how to handle your finances and liabilities properly. Lenders feel more confident in giving you loans and credit lines. In other cases, being creditworthy can also get you better interest rates and repayment terms. 

Most people assume that a borrower’s creditworthiness is only measured through their credit scores. When in reality, lenders look at other important factors too. 

Six Qualities That Make A Business Creditworthy

In order to make your business creditworthy, you need to learn to look beyond the numbers. Here are six factors to keep in mind on top of maintaining a good credit score for your business:

Credit History

Lenders will most likely look at the credit history of your business first. They’ll check how many lines of credit you have open and see if you have any outstanding debts. The older your credit accounts are, the better.

Creditors also look at your payment habits. They want to see if you have a consistent track record of paying off your debts on time. Sometimes, they’ll even analyze your personal credit history to see if you have good financial management. 

Business Plan

Some lenders ask for business plans to see if the borrower has done its due diligence. Now, your business plan doesn’t necessarily have to include every single thing about your company. 

However, it should include market potential, competition, and your business’s overall structure. 

A well-written business plan can reduce your business’s risk levels and increase your chances of getting your loan approved. 

Cashflow & Capacity

Positive cash flow is another element that creditors look for in creditworthy businesses. Having positive cash flow means there’s more money coming in than going out of your business. This shows lenders that you have the means to pay off your debts. 

Some creditors also calculate a borrower’s debt-to-income ratio. They’ll check if you can fit loan payments into your budget after all of your monthly bills. 

Collateral

If your small business is relatively new, lenders may ask you for collateral to protect their investment. This includes your equipment, machinery, inventory, and any other valuable asset your business has. 

Collaterals can help offset your business’ perceived risks. Creditors typically use it as a security policy should you fail to pay off your loans

Trade References

If you’ve established trade lines with vendors and suppliers, you can use them as references. Excellent trade references show that you consistently make timely payments to your suppliers. It helps reassure creditors that you’ll be able to make loan payments on time. 

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Industry & Market Trends

Lenders also consider the industry and market your business is participating in during evaluation. They check to see its market conditions, growth prospects, and risks.

Being in a stable industry helps with the creditworthiness of your business. However, if the industry is volatile, it could raise concerns and cause creditors to consider your business as a high-risk borrower. 

How to Improve Your Business’s Creditworthiness

With all these factors in mind, how can you make your business creditworthy? Here are a few things you can do to improve your standing:

Keep Credit Accounts Open

If your business has a couple of credit accounts it doesn’t use, keep them open. Having a long-term credit history shows lenders that you’re a trustworthy borrower. 

Avoid Applying For The Same Loan

While diversifying your business’s credit lines is a great way to build your score, avoid applying for the same loan from different lenders. 

This approach can negatively affect your company’s creditworthiness. Ideally, you should only work with no more than two lenders.

Register Your Business

If you haven’t registered your business yet, now’s the right time to do it. Doing so will give your business its own identity and allow it to build its own credit report. Once your business is registered, you can start applying for bank loans and credit lines. 

Monitor Your Reports

Although there are plenty of other factors that affect your business’s creditworthiness, it’s still important that you monitor your credit reports regularly. This way, you’ll be able to correct errors and track any potential issues that could bring your score down. 

Regularly checking your reports and proactively solving potential red flags is one of the best ways you can improve your business’s creditworthiness.

Conclusion

Understanding the different factors that influence a business’s creditworthiness is important when seeking financial stability and growth. While credit scores are significant, they represent just one piece of the larger puzzle.

By learning how these elements affect your score, you can adapt, mitigate risks, and seize growth opportunities. Remember, a well-informed approach to financial management can help your business in the long run.

If you’re having trouble boosting your business’s creditworthiness, we’re here to help. NCH is one of Nevada’s leading business formation service providers. 

We offer credit-building services to help you better understand how business credit works. Our business specialists will help you identify which areas in your credit report need improvement. 

We’ll work with you to create comprehensive solutions and ensure your business gets the credit report it needs to succeed. To learn more about our services, you can visit our website here or call us at 1-800-508-1729.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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