Ensuring your small business can weather the storms ahead

By James McGarva, below, Managing Director Business Information Services, Experian

Building strong financial foundations has never been more important for small businesses. But recently, the Federation of Small Businesses (FSB) warned that small companies are increasingly reliant on debt to survive with the number of businesses applying for finance increasing to 13 per cent in the past three months. Concerningly, nearly half of SMEs also fear that access to business credit will become more difficult over the next few years.

But business owners must remember that, despite living through these uncertain times, they are not powerless. There are actions they can take to ride out the economic turbulence ahead and set their businesses up for financial success in 2023 and beyond.

Dedicate time to your credit score

The reality for SMEs is that loan repayment costs are higher because interest rates have increased, at a time when there are near-record levels of SME debt. This makes it even more vital to secure the best lending rates available. To do this, your business needs to prove its creditworthiness, which measured by credit reference agencies, which compile data based on previous business and credit transactions.

Made up of several factors including the financial position of a business and its level of financial risk, companies and lenders will check the credit rating of new suppliers or clients to reveal any hidden red flags and ensure working relationships don’t result in late payments or bad debt.

Dedicating time to improving your credit rating is essential for any business considering applying for a loan. But how can you go about improving it? The first step is to check your company credit score and report any incorrect or out of date information. If the information in the credit report is correct but still causing problems, it needs to be repaired. Sort out any inconsistencies, such as different addresses on accounts. Use a landline as a contact number rather than a mobile as it shows a more stable position.

It’s also good practice to be update to date with bookkeeping and ensure that you file on time with Companies House. Late filing not only incurs an automatic penalty but can have a detrimental impact on your credit score.

The benefits of improving your credit score also extends beyond securing commercial loans. Businesses with a higher score can potentially benefit from better payment terms on trade credit accounts, as well as setting appropriate credit limits. In some cases, like the construction sector, which rely on complex supply chains, business credit is fundamental to enabling operations and securing favourable contract terms.

Directors shouldn’t neglect their own credit scores either. Keep an eye on your personal finances. Directors’ personal credit scores can be considered for new businesses when little company information is available. You may also want to appoint a director with a strong history of running companies and a good credit score to help boost your own company’s standing.

It can be difficult to find the time to prioritise improving your credit rating, which is why we recently launched the Credit Review Service to help SMEs monitor and improve their financial resilience easily. Small businesses can now improve their business credit score swiftly using new, relevant information, including data from their management account and debtor book. This first of its kind service will be essential in helping SMEs face the economic storms ahead.

Remember that cashflow is king

Late payments regularly catch out SMEs, but good cash flow management is the backbone of financial resilience. Making payments on time will demonstrate to prospective lenders that your company is a responsible organisation to conduct business with. While late or non-payments could damage company finances and impact the ability to pay suppliers and secure credit.

Where possible, try not to use the full amount of credit available and pay more than the minimum amount required on credit cards. This proves that the company isn’t solely reliant on credit and helps to boost the company credit score.

You should also check your working capital needs regularly. You may need to improve cash flow by minimising the period between invoicing and receiving payment and negotiating shorter payment terms with your customers.

Don’t let yourself forget about fraud

At times of financial stress, business fraud tends to increase, and it can be tempting to go for deals that are too good to be true. As cash-strapped SMEs face tough financial decisions and look for new ways to access funds, there’s an increased risk of falling victim to fraudulent offers and non-legitimate businesses.

It is vital to be wary of fraudsters, and to remain vigilant with fraud detection and prevention checks. Skipping these steps now could result in financial difficulty later down the line, so ensure that you know who you’re doing business with. Can your business partners can be easily identified? Is that third-party business you interact with a genuine company?

Strong financial foundations will not only set businesses up for the challenging year ahead, but will also set you on the path to success for the long-term. Make sure you take the time to invest in your finances, and prove that your organisation is dependable and creditworthy.