Making your business creditworthy

There are more than 2.4 million small- to medium-sized businesses, or SMEs, in Australia today. Despite massive disruption during the COVID pandemic, these businesses still account for more than 98% of all enterprises in the country, ranging from restaurants and hair salons to florists and mechanics, touching every industry and market. 

Many of these SMEs seek financing for a variety of reasons, especially when looking to grow. For example, if your company needs to purchase large (and expensive) capital equipment, but your business doesn’t have enough cash on hand, you might seek funds to cover the cost.

Other reasons your company might seek financing include the need to renovate an existing building or move to a new one, to upgrade existing equipment or technology, to hire more staff, to help with cashflow, or to purchase inventory.

Most of the time, that funding comes in the form of a bank loan. According to a 2021 report released by the Government’s Productivity Commission, most Australian SMEs still access funding from banks and other financial institutions – at the time of their report, banks issued 91% of SME debt.  

However, if your business creditworthiness is found to be poor by lenders, your search for funding could come to a screeching halt.

Why is creditworthiness so important for SMEs?

For SMEs, applying for and receiving a business loan isn’t much different from taking out a personal loan. Banks generally evaluate your company based on factors including your prior financial performance, your future projections, and your company credit history – and just as you can be denied a personal loan because of a poor debt payment history, the same can happen to your business. 

This is a primary reason why having a good credit rating is so important – however, it’s not the only reason. Having a strong business credit rating can also mean getting more favourable terms from your bank, such as lower interest rates, longer repayment periods, more funding, and bigger lines of credit. 

The same is true with vendors and property owners. With vendors, a better credit score might help you get discounts or better credit terms, and it can also give you more leverage when negotiating insurance premiums or lease terms with a landlord. 

How to improve your business credit score 

In general, according to major credit reporting agencies in Australia, a good business credit score is somewhere between 75-100, with a fair credit score between 50-75.

To improve your business creditworthiness and score, the most important thing you can do is to keep and maintain strong financial records, including balance sheets, income statements, tax forms and all necessary legal forms. Having these materials up-to-date and readily accessible for review allows you to apply for financing when the need arises.

It’s also important to:

  • Create and stick to a budget, which makes it possible to better manage your cash flow and maintain liquidity
  • Ensure your bills are paid on time
  • Maintain a healthy level of debt (generally, no more than half your liquid assets)
  • Check your credit rating regularly, especially before you apply for funding. If you find an error, follow up and raise a dispute.

Plan ahead and build strong relationships

In addition to having strong financial records, creditworthy businesses plan for success by building the right relationships with service providers, including accounting and tax professionals. Developing long-term relationships helps these experts understand your business at a deeper level, providing you with the support and knowledge to help you secure funding when needed.

Looking to build a relationship with an award-winning accounting firm? Contact Accru today.

About the Author
Chris has spent his entire career at Accru Harris Orchard. After joining in 1981, he left to study, and to gain experience working overseas – and then returned to the firm he feels so much a part of.
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