Start-ups are missing a trick by overlooking their credit profiles.
Recent calls by the Federation of Small Businesses for the Coalition Government to "nurture a culture of entrepreneurialism" highlight growing nationwide recognition that more needs to be done to help the 2.5 million people currently out of work in the UK.
There has always been much rhetoric surrounding the subject of entrepreneurialism, but irrespective of whether you believe Britain is truly a nation of entrepreneurs, the fact is that many people are now having to consider starting their own businesses simply through a lack of any other employment opportunities.
Of course, while setting up a new business is certainly easier than ever before, a myriad of factors must still be considered, irrespective of whether you’re a savvy entrepreneur or you’re setting up shop for the first time.
Prospective business owners are required to pay great attention to selecting the best location for their venture, finding reliable suppliers, recruiting skilled and motivated core employees, choosing a supportive banking partner and seasoned legal representative, as well as making many more critical decisions that will shape the future course of the business.
However, all-too-often, addressing the new firm’s credit profile is not included on this key priorities list, despite the fact that it could affect a company’s ability to win contracts or secure a lease, causing all manner of issues.
Weak credit ratings
Firms with weak credit ratings will find that suppliers are skeptical of their ability to pay their bills, and thus either refuse to do business with them or enforce stringent payment terms.
They will also struggle to attract new customers, as the low credit rating will raise doubts about the long-term viability of their business.
Finally, they will struggle to attract new sources of finance, as lack of information about a business means there will be a greater level of risk for lenders to take.
The more information that is available about a business, the better position it will be in with regards to its credit status. However, by the very nature of a start-up business, there will be very little information available.
This is why it is essential for newly formed businesses to understand their credit status and make it a key priority, so that they start off on the right foot.
It’s little surprise that our analysis into new businesses shows that less than five per cent of start-ups ever go on to deliver consistent, rapid growth - while up to 40 per cent of new companies will typically shrink or cease trading altogether within three years of formation.
Whilst having an innovative idea or identifying a market niche is undoubtedly important, customers, suppliers and finance are the things needed to get a new business off the ground.
In contrast, the small handful of start-ups that manage to overcome these initial hurdles are likely to be the ones that take a proactive approach to credit, considering the issues and possible implications upfront, and taking the necessary steps to ensure their business is visible, so that they receive the healthiest possible credit rating.
How to start
Credit ratings typically start with assessing the directors themselves and their history of previous business ventures. If you’re starting up for the first time, it may be advisable to try and find a partnering director. Even more advantageous would be if you were to partner with a director that has previously experienced start-up success.
Our analysis has shown that businesses started by two people or more have a greater likelihood of survival than those businesses with one director. Not only will you benefit from your partner director’s previous experience, but it will also positively impact the new business’s credit score.
When looking at suppliers, there’s no doubt that small firms need to try and secure the best possible deals on business essentials such as utilities, telephone and banking, yet because they don’t yet have a credit history, this can set them at a disadvantage from the beginning.
So what can be done? For start-ups, it makes a lot of sense to ensure your business is registered with a directory, such as Thomson or Yell, but also to approach credit reference agencies proactively.
You need to make sure their credit line is in order before you start making purchases, and should give serious thought to building your credit profile at an early stage so that you can secure the terms you want with suppliers.
As your business gets going, it may also be worth trying to encourage suppliers to provide feedback and share data on how your payment records are seen externally, to assess whether your business is being represented in the best light.
Accurate credit rating
Ultimately, at any stage during a firm’s development, the more information there is in the public domain about a business or provided to credit reference agencies, the greater the likelihood of a more accurate credit rating.
For a start-up, where the chances of failing are already higher than more established firms, this type of proactivity could make a big difference in ensuring the business starts off on the best possible footing.
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