What you need to know to maintain a positive credit record

According to the latest quarterly reports released by the National Credit Regulator (NCR), 10 million South Africans are in arrears on their accounts or are struggling to pay their monthly debt repayments. Bad debt can have far-reaching effects, especially if you’re a business owner. If you’re not careful, when the time comes to expanding your business, bulk up on stock, run marketing campaigns or purchase new equipment, you might find yourself unable to get access to business credit.

Your creditworthiness is based on several criteria that then determine your credit score. Ultimately the higher the score the better. When a financial institution considers lending you money, whether it’s small business funding or much larger sums, they use this credit score as part of the evaluation process and to determine affordability.  Your credit score also helps lenders to evaluate the risk of providing you with a line of credit.

How is it calculated?

Your credit score is calculated using a formula that evaluates how you pay your bills, how much debt you carry and how that compares with other borrowers. In effect, it gives insight into how you manage your existing credit and what that means for future credit. Each credit bureaus has slightly different metrics or models for calculating credit scores.

Why you should check your credit score at least once a year

According to the National Credit Act, every consumer has the right to one free credit report in a 12 month period from the following credit bureaus: TransUnion, Experian, XDS and Compuscan 

Your credit score is an indication of your financial health. Checking your credit score regularly helps you to know where you stand. If you are aware that your credit score isn’t in good shape this knowledge helps you to start putting measures in place to improve it. On the flip side, if your credit score looks positive you can continue to maintain that through good practices. Knowing your credit score puts you in control and can help to keep you accountable.

It’s also good practice to check in on your credit score and take advantage of your annual report to ensure that your credit information is correct. Data may have been captured incorrectly and therefore reflect a poor score that actually needs to be disputed. You can only do this if you are aware that there is an issue. If you do come across any discrepancies contact your credit bureau to fix this so that it doesn’t reflect negatively on you or your business.

What a negative credit score can mean for your business?

• It becomes difficult to get approved for credit

Your business might need equipment upgrades, to move to a new premises, or purchase inventory urgently. For these reasons, you might need quick access to small business funding. But without a good credit record, you will battle to qualify for this. Maintaining a healthy credit score will ensure that you can access business funding at any given time. A small business tends to incur many costs, sometimes these are unexpected, so having access to this can be a lifeline for your business.

• It drives up rates and terms on approved credit

If you’re lucky enough to get a loan with a bad credit history, you’ll still be at a disadvantage. Lenders generally view applicants with bad credit as a big risk. To counteract this risk, they tend to charge higher interest rates or give a smaller credit limit. Keep in mind that a lender isn’t obliged to give you the interest rate that they advertise.

• It can increase your insurance premiums

In light of an unstable economy business insurance is important to have in place to protect yourself in an unexpected financial climate. Finding affordable insurance is difficult enough, but when you have a low credit rating, insurance companies tend to increase your premiums.

• It negatively affects business relationships

Other businesses, or potential clients, may be less inclined to do business with you as they can take your poor credit rating as a sign of poor financial management. Subsequently, people may find it hard to trust you or your business, consider you too high risk and avoid conducting business with you altogether.

Things you can do to improve your credit score

Your credit score isn’t static, it can improve or worsen depending on the circumstances. However, there are things you can do to ensure it stays positive and things you can do to improve it.

• Ensure that you pay your accounts on time. Paying late has a negative effect on your score. If you are struggling to pay your bills, contact your creditors to arrange a suitable agreement. The National Debt Advisors is a useful organisation to contact when you have large amounts of debt to pay off. They act as the intermediary between you and your creditors, work out a plan for you to pay off your debts, and offer advice on how to handle your debt.

• Avoid taking on new credit that you don’t need. As far as credit is concerned, it is best to assess what you really need in terms of your personal and business capacity, and stick to this.

• Keep a track of your credit record and make sure the information is correct. If you find any errors, contact someone at one of the credit bureaus mentioned above.

• Credit isn’t always a bad thing, as long as it is managed well. Sometimes having credit can raise your score as it builds a history of how you handle your finances. In fact, in many situations, getting credit without having a history of credit can be difficult.

Benefits of a good credit score

Lucille, the Senior Credit Manager at Lulalend, notes that “If you have a good credit score you have the freedom to shop around and get the best deals on loans and funding. With a decent credit score, you can also negotiate better rates.” Excellent credit means that your business will more easily qualify for credit with lower interest rates and other rewards such as cash back offers, travel points or other incentives.

If your business and your personal credit score is good, then it makes access to funding a much easier process. At Lulalend we offer hassle-free small business funding if your company has been operating for a year and is making a turnover of at least R500 000 per annum. We also assess your affordability using our cutting-edge technology to ensure that we can best serve our clients with quick, easy access to funding but do so responsibly. If you feel positive about your credit score and are looking for business funding contact us to find out more about our product offerings.