Use these strategies to build up your credit and gain the trust of lenders

Your personal and business credit scores are important factors a banker will consider when you apply for a business loan.

While your business’s financial strength is important, a bank will also look at your personal credit score when deciding whether or not to give you a loan.

If you think your personal credit score could be a problem in obtaining a business loan, don’t despair. There are strategies you can use to improve your credit rating.

1. Pay your bills on time

Consistently paying your bills on time isn’t only a good way to avoid interest and penalties, it’s also the best way to build your credit history, improve your credit score and show your banker you are a reliable business partner.

Your payment history is the most important aspect of your credit score. Even a slight delay in your bill payment could have an impact.

2. Have the right credit mix

The credit rating bureaus look at what types of debt you have when determining your credit score. Having too many credit cards, for example, could negatively affect your score, especially if you are using one card to repay money you’ve borrowed on another.

Similarly, opening multiple credit accounts at the same time will have an impact on your credit score. The same goes for making too many credit inquiries with the credit bureaus.

To avoid negatively affecting your credit rating, make sure you only apply for the credit you need and believe you will be approved for. And don’t apply for multiple credit products at the same time.

3. Keep your credit utilization rate low

The amount of credit you use is considered a predictor of default risk and will have a direct impact on your credit score. In general, the rule on credit usage is that a low utilization is better. Less than 10% is preferred.

In general, the rule on credit usage is that a low utilization is better. Less than 10% is preferred. Always pay back credit cards and unsecured lines of credit as soon as possible.

4. Separate your business credit from your personal credit

Your business credit score is separate from your personal score and includes reports from firms that do business with your company, such as suppliers and financial institutions.

You should separate your business credit from your personal credit as much as possible. Use business loans, your business line of credit and business credit cards to finance investments, purchase supplies and top up working capital.

5. Check your credit report regularly

Credit reports aren’t perfect. Names may be misspelled, other people’s information can end up on your file and debt that you’ve paid can still be listed.

It is good practice to check your credit report regularly. This will ensure the report is up to date, that all the information is correct and that you have not been the victim of fraud.

Your personal credit report can be easily obtained from either of two service providers in Canada—Equifax Canada or TransUnion. Visit their websites to learn how. For your business’s credit bureau report, there are three options—Equifax Canada, TransUnion and Dun & Bradstreet. Because agencies don’t share information, it’s a good idea to review your credit history from all the credit agencies.

6. Avoid debt collection and bankruptcy

Leaving bills unpaid to the point where your debt is referred to collection agencies, your assets are seized or you have to file for bankruptcy will obviously hurt your credit score.

Always avoid getting into a situation where a creditor will go after your assets publicly. Collection and bankruptcy are very negative for your credit score. Avoiding that would be critical for having good creditworthiness.

7. Be patient

It’s difficult to estimate how long it can take before someone’s credit improves significantly. He advises entrepreneurs to start building their credit history early on.

Start with personal and business credit cards and keep utilization low. That will generate the type of history that will be good for both your personal and business credit scores.”

When does it make (cents) to pay early?

Businesses often offer discounts to customers who pay their bills early. Does it make financial sense to take advantage of these discounts?

The answer is usually yes. They can actually be very lucrative for your business and justify using your extra cash or borrowing to take advantage of them.

But they’re not good for all businesses. Whether they are a good idea for your company depends on a few factors, such as your return on investment, financing costs and cash flow.

Here’s how to figure out whether it’s worth taking a discount for early payment—and whether it makes sense for you to offer one to your own customers.

37% annualized return

Let’s say your supplier offers a 2% discount for paying an invoice in 10 days. Otherwise, the full amount is due in 30 days. This common discount is known as 2/10 net 30.

If you pay in 10 days, it means you’re giving up the use of your money for 20 days in exchange for 2% off. A 2% return over 20 days turns out to be pretty impressive. It works out to a 37% return when annualized.

Even a 1%/10 net 30 discount works out to an 18% return when annualized.

Right for your business?

But the discounts aren’t always worth taking. You have to weigh them against your return on investment, cost of financing and cash flow.

If you earn less than 37% from an investment in your business or pay less to service your debt, you’re best off taking a 2%/10 net 30 discount.

But if your investment return is above 37% (which can be the case especially for some start-ups), then taking the discount doesn’t make financial sense. You could earn more putting the money to work in your business.

Similarly, in the unlikely event that your cost of financing is above 37%, taking the discount isn’t a good idea. You’re better off paying down your debt.

Cash flow is another important consideration. If cash on hand is tight, you should take a pass, even if your financing cost or investment return is above 37%.

When to offer a discount

What about offering early-payment discounts to your own customers? The math works in reverse and that means offering them is very costly.

Your own return on investment or financing cost would have to be above 37% for it to make sense to offer a 2%/10 net 30 discount on an invoice. It would have to be above 18% for it to make sense to offer a 1%/10 net 30 discount.

Thus, unless your business is experiencing cash flow problems or the return on investment of the business is very high, it’s probably not a good idea to offer a discount for early payment.

Probably not worth it

If your customer is paying you within 30 days, it most likely doesn’t make sense from a financial point of view. If you decide to stop giving discounts, it might encourage your customers to start paying late.