For small and medium-sized businesses, access to business credit, loans, and financing solutions can be crucial for ensuring long-term success.

Having access to working capital allows businesses to manage ongoing operational expenses while exploring opportunities for growth and expansion. Read our guide on how to access the right funding to fuel your business’s growth here.

However, not all SME owners and managers fully understand business credit – how it works, why it is essential, and how to build it effectively.

Understanding Business Credit

Business credit is a measure of the creditworthiness of your business. In other words, how risky a lender considers your business to be. It is important to note that business credit is distinct and separate from one’s personal credit.

Business credit refers to the financial report or score that lenders, investors, and vendors use to assess whether to extend a line of credit or engage in business with you.

However, even if you are not planning on applying for a business loan in the immediate or short-term, a robust business credit profile offers numerous advantages.

  • You can secure even more favourable trade, loan and interest rate terms.
  • You can negotiate stronger and better payment terms with suppliers.
  • You can attract more investors and greater investment.
  • You can negotiate lower insurance premiums.
  • You can further protect your personal assets by improving your ability to separate personal and business finance.

The Factors Impacting Business Credit

The first step in effectively building your business credit is understanding the factors that impact credit scores and how to manage and improve them.

1. Payment History 

Your business’s payment history is a cornerstone of strong credit profiles. A seamless accounts receivable process, where customers or clients pay bills on time – or better yet, early – demonstrates reliability, consistency, and financial stability to potential lenders.

2. Credit Utilisation 

The amount of credit your business is currently using compared to the credit limit extended to your business determines your utilisation. Lower credit utilisation ratios – ideally 30% or less – indicate that your business is both able to and does manage lines of credit responsibly and that your business is not overextended financially.

3. Credit History 

Your credit history, or more specifically – its length, can significantly impact your credit score. A well-established credit history can strengthen your financial profile, while a limited or weak credit history may make securing future business loan approvals more challenging. For SMEs, new businesses and start-ups this can be a difficult barrier to manage. On the one hand, they do not have the requisite length of time to prove a strong credit history and on the other hand they are not able to build up the credit history needed due to that same history.

If your SME is in this Catch-22 position, we recommend speaking to our team today. There is a range of alternative financial options available to help you access the credit you need beyond conventional business loans.

4. Credit Mix 

Businesses with a diverse range of credit types, for example credit cards but also term loans, can enhance one’s credit profile. It indicates to potential lenders or investors that your business is able to handle different types of financial obligations and service such facilities accordingly.

For a detailed breakdown of the factors considered when applying for a business loan, read our article on assessment requirements here.

Strategies for Building Strong Business Credit

Avoid Late Payments 

While we’ve highlighted the importance of ensuring your customers and clients pay on time to maintain consistent cash flow, it’s equally crucial for building strong business credit that your own payments, especially for loan repayments, are made on time as well. Even a single instance of late repayment can significantly impact your credit score negatively and can remain on your report for years.

To find out more, read our guide on business loan repayments.

Maintain Low Credit Utilisation 

High credit utilisation – i.e., maxing out your business lines of credit – indicates to lenders that your business is struggling with cash flow and therefore financially. Maintaining a low credit utilisation as a baseline provides flexibility for short-term increases when needed – for example, capitalising on a market growth opportunity – while allowing you to return to lower utilisation over time.

Excessive Credit Inquiries 

As part of due diligence, it’s important to explore business loan and financial solution options from multiple providers. However, excessive inquiries – especially when your credit report reflects a low score – can give the impression that your business is struggling and not creditworthy.

Before you apply formally for a business loan, make sure to check out our step-by-step guide to loan applications.

Maintain A Strong Business Reputation 

Financial records are not the only reputational factors lenders take into account. Unfavourable public records, such as legal disputes or bankruptcies, can significantly impact a business’s credit. Such records can remain on your report for up to 10 years, making it difficult to secure financing as lenders may consider your business too risky to extend a line of credit to.

Utilise Credit Diversity 

As your business grows, you may be able to mix different credit types to help improve your score. Applying for and using a business credit card responsibly, for example, is a simple way of building up a record of your financial acuity and reliability.

Invest in Building Strong Networks 

Cultivating relationships with lenders, as well as vendors, can help you obtain the advice you need and leverage assistance as required. This way, when you are ready, you will be able to secure the finance solutions you need to fuel your growth.

ScotPac – your business funding partner

Whether you already have strong business credit and want to explore financial solutions or need tailored advice on improving your credit score, reach out to the ScotPac team today.

We are the largest non-bank business lender in Australia and with over 35 years of experience and more than 8,500 businesses currently supported by our team, we are in the best position to help fuel your long-term growth and success.