How Can You Maintain a Credit-Worthy Business?

How Can You Maintain a Credit-Worthy Business?

Author: Sara Going, Director, Community Banking

In 2022, 56% of U.S. businesses with fewer than 500 employees did not apply for financing, and it wasn’t because they didn’t need funding. According to the Small Business Credit Survey, the companies had weak financials, inhibiting their ability to qualify for credit.

The study highlights the need for small to mid-sized businesses (SMBs) to regularly monitor their financial performance and take steps to ensure credit worthiness.

Why Credit Worthiness Is Important for Small to Mid-Sized Businesses

Businesses seek financing for many reasons. For some, a large equipment purchase may be needed to help meet new demand. If the business lacks the working capital to cover the purchase, credit can facilitate growth.

A business may need funding for other expansion efforts, such as a large advertising campaign or renovation of an existing establishment to improve customer appeal.

Growth is not the only reason a company may seek financing. Often, a lack of working capital makes funding imperative to support day-to-day operations.

The Small Business Credit Survey revealed that 62% of businesses that applied for funding in 2021 did so to meet operational expenses. Unfortunately, only 11% of those were eligible to receive full funding, whether requesting a loan or line of credit.

In these cases, stronger financials may have positioned the company for better credit success.

Maintaining Strong Financials Requires Vigilance

For SMBs, applying for and receiving business loans isn’t all that different from taking out a personal loan. Lenders evaluate a company based on many factors, including prior financial performance, future projections and credit history.   

To establish their financial standing, businesses submit a series of documents during the loan origination process. This includes balance sheets and income statements, tax forms and applicable legal forms. Having these materials current and readily accessible allows a business to apply for financing when the need arises.

Of course, more important than the financial records themselves is the information included therein. Maintaining strong financials requires a forward-looking perspective as well as dedication to maintaining profitability.  

Start by setting a budget that governs spending according to anticipated income minus known expenses. Sticking to  budget makes it possible for a business to better manage cash flow and maintain liquidity.

Finally, maintain a positive payment history with existing or prior loans, lines of credit and credit cards. Just as an individual may be denied personal financing based on a poor debt payment history, the same can happen to your business.

Growing Relationships and Thinking Ahead

In addition to having strong financials, credit-worthy businesses are future driven and plan for success by building the right relationships.

This includes associations with professional service providers, such as attorneys, accountants and tax professionals. Developing long-term relationships early allows these experts to get to know your business at a deeper level, providing you with knowledge and support to help guide your endeavors.

And while you’re creating your business support team, don’t forget your banker. A qualified commercial banker will get to know your organization’s objectives, finances and needs, and will help steer your company toward its financial goals.

Build trust with your banker well before you need financing. Transparency and communication are vital to this relationship. If there are past problems or if future issues may arise, bring those to your lender’s attention right away. These may be difficult conversations, but an ounce of prevention is worth a pound of cure.

In the end, maintaining a credit-worthy business incorporates many of the building blocks you’ll need for financial success, and makes it possible for you to fuel future growth through financing when the need arises.

About the Author

As a Director of Community Banking, Sara has a passion for serving the community. She works with businesses of varying sizes, particularly those in the non-profit sector, to drive change and support local growth.