Start-ups often rely on funding unless they start making enough profits. There are several sources to raise money from which include but are not limited to direct lenders, angel investors, and venture capitalists. Your credit score plays a pivotal role in raising money.
It is a common trend among direct lenders that they cannot make a lending decision without perusing your credit report, but investors also take account of your credit health. After all, they are investing their hard-earned money in your business and they would never want to associate with a business that has a bad reputation for making defaults.
If you buy raw material on credit, your suppliers will also look at your credit rating. Suppliers will be unable to provide you with raw materials on credit when they find out you do not pay on time. Your business credit rating determines your business’ reputation, so you cannot ignore the health of your credit report.
How bad credit affects your business
Here is how your relationship with investors and suppliers will be affected due to your poor business credit rating:
- You will have limited access to quality suppliers
Suppliers will check your financial stability before selling you anything on credit. They would check whether your business has the ability to meet payment obligations. With a bad credit rating, you will have limited suppliers. Most of the quality suppliers do not wish to partner with businesses where cash flow is a huge concern. Those who provide you with supplies on credit will not offer you a favourable repayment length. You cannot expect additional benefits that you can obtain as a result of a good relationship. Getting high-quality materials for your business is another challenge.
- Strained trust
The lack of trust can strain your relationship with your suppliers. You might have genuine reasons for delaying payments, but your supplier will distrust you. A previous record of late payments will call your credibility into question. Your business might find it hard to receive a consistent supply of materials. Similarly, your lenders will be hesitant to lend you money. Despite a good business or project, your lender will be reluctant to sign off on your application for a business loan. A few lenders are out there providing business loans for bad credit. They will charge higher interest rates. The repayment length will also be short.
When you raise money from investors, you are supposed to share a proportion of the profits of your business with them. Investors are investing money in your business: they are not lending to you. They will be part of the board of directors and involved in the decision-making process. Of course, they will raise an eyebrow when they find you have struggled with payments in the past. They will never be inclined to partner with a business subject to losses and a bad reputation.
- Limited access to financial products from lenders
Banks will straightaway turn you down when your business credit report is not in good condition. Thankfully, there are a few lenders who may consider your application despite a bad credit rating. Unfortunately, they will not be able to let you take advantage of all types of financial products. Some loan deals, including credit card deals, are reserved only for good credit borrowers. It is important to prove a healthy cash flow to qualify for some deals.
- Weak negotiation power
Negotiations will likely break down when your credit rating is not so good. You will have difficulty negotiating for lower prices and longer payment terms. Suppliers may ask for upfront payments and offer shorter payment cycles.
Ways to lower the impact of bad business credit rating
Here are the ways to lower the impact of bad business credit rating on your relationship with investors and suppliers:
- Build a good credit rating
A good business credit report is vital to go a long way. You should come up with a strategy to pay off your debts on time.
- Make sure you clear your credit card balances in full.
- Take out a new loan with an extended repayment term. Make all payments on time.
- Keep your personal credit report in good condition as well because it will be checked if you are a start-up.
- Credit builder loans can help improve your credit rating.
- Keep your debt-to-income ratio and credit utilisation ratio as low as 30%.
It will certainly take some time to build your credit rating.
- Communicate openly
You should be transparent with your suppliers about your business credit rating. Chances are it is bad due to some unavoidable circumstances. Give a true picture of your situation. Proper communication can help build trust and demonstrate your commitment. Once you win their trust, you will be able to qualify for better deals. However, when it comes to investors, the overall situation of your business must be excellent.
- Establish strategic partnerships
You should form a strategic partnership with suppliers who do not mind working with you despite poor business credit profile. Over time as you build long-term relationships with them, the partnership will open doors for better terms and increased flexibility.
The final word
Bad business credit can make it impossible for you to collaborate with investors. Your business will face difficulty growing without sufficient funds. Suppliers will also be reluctant to offer you affordable and favourable deals. You should try to improve your business credit file. It will take some time, but your consistent efforts will make it happen.
Keep your personal credit rating in good condition, too, because it will be considered when you are a start-up. Other important factors are your business plan and the likelihood of your success. Do not forget to inform HMRC of any changes in your business information quickly. It will help keep your business credit rating accurate. Regularly check your credit report and sign up for alerts when any changes are made to your credit file record.