For many small- and medium-sized business owners, the decision to seek external funding through a business banking loan can mark a significant milestone in their entrepreneurial journey. Taking out a loan provides the funds needed to expand operations, invest in new equipment, or seize growth opportunities.

Depending on their specific needs and financial circumstances, business owners can apply for a loan through various sources. For instance, entrepreneurs in the Philippines can use Maya Business’s Maya Flexi Loan to fund their small or medium-sized businesses. However, before diving headfirst into the loan application process, it’s crucial for business owners to prioritize building their creditworthiness. 

A key factor that lenders consider when evaluating loan applications is the applicant's creditworthiness, which is assessed through their credit score. A business with a strong credit score has a higher likelihood of getting their loan applications approved; they may secure more favourable terms and interest rates.

But how can one boost their creditworthiness? Let's delve into some tips to improve your credit ratings so that you can position your business for better financing opportunities.

Pay Your Bills on Time

Paying your bills on time is one of the most crucial factors in determining your creditworthiness. If you consistently pay your company’s bills before or by their due dates, you demonstrate reliability and responsibility to lenders—which also improves your creditworthiness over time. Late payments can have a significant negative impact on your credit score, making it harder to secure favourable loan terms.

To streamline your bill payments, enrol your billers in your business bank account and set up automatic transfers. This way, you won’t miss a payment deadline. 

Clear Outstanding Debts

Outstanding debts, such as credit card balances or loans, can weigh heavily on your business’s creditworthiness. Develop a repayment plan by prioritizing debts with the highest interest rates or balances. You should also consider debt consolidation when possible to make your monthly amortization more manageable. With low or zero debt, lenders are more likely to grant you a loan because your business will be perceived as a low-risk borrower.

Paying off your debts diligently will also prevent your account from being sent to debt collection agencies. If you have debts in collection, your creditworthiness score will be severely affected. Thus, you should never allow your debts to grow exponentially as this will not only risk your reputation and limit your access to financial products like business loans, but also endanger your financial stability. If you’re experiencing financial difficulties, communicate with creditors to explore alternative repayment options and avoid collections.

Maintain a Low Credit Utilisation Rate

Your credit utilization rate, or the percentage of your available credit that you're currently using, is a key factor in your credit score calculation. If you’re able to keep your credit utilization rate low, you’re showing lenders that you can manage your finances responsibly and you’re not relying heavily on credit.

To lower your credit utilization rate, avoid maxing out your business credit cards even if you plan to pay off the balances in full each month. If or when possible, consider applying for an increase in the credit limit on your existing business credit cards. However, make sure that your spending habits stay the same and that you continue to make your monthly payments on time. Drastically increasing your spending with your new credit limit can harm your credit score.

Diversify Your Credit Mix

Having a diverse mix of credit accounts demonstrates your ability to responsibly manage various types of credit, greatly improving your credit score. Lenders prefer to see a combination of different types of credit, such as revolving credit (e.g., credit cards) and instalment loans (e.g., auto loans). However, be cautious when adding new credit accounts and only take on additional debt that you’re sure you can comfortably repay on time.

Monitor Your Credit Regularly

Regularly monitoring your business credit is essential for maintaining and improving your creditworthiness. By staying informed about your credit score and credit report, you can identify any errors or discrepancies that may be negatively affecting your credit rating. Additionally, monitoring your credit allows you to detect signs of identity theft or fraudulent activity early, minimizing potential damage to your credit.

Sign up for credit monitoring services offered by credit bureaus or financial institutions to receive alerts about changes to your credit report. Also, review your credit report from each of the major credit bureaus at least once a year to check for inaccuracies. If you find any problems, take immediate action to prevent them from affecting your creditworthiness.

Building and maintaining a strong credit profile is essential if you’re planning to secure a business loan. When you have a good credit score, lenders will view you as a reliable borrower who can handle credit well. It can be challenging to build good credit, especially for small enterprises. However, by implementing the tips outlined in this article, you can steadily improve your creditworthiness and secure your business’s position for long-term financial success.