9 Ways Businesses and the Self-Employed Can Improve Their Creditworthiness

For the self-employed, it is not always easy to get a loan. Creditworthiness not only has a decisive influence on lending but also on the amount of interest. The better the credit rating, the cheaper interest rates are granted. The banks carry out a rating for the credit check, in which they check the probability of a payment default on the basis of various factors and mathematical methods. Grades are awarded for the rating.

Aside from getting simple approval NET 30 accounts, companies and the self-employed can improve their creditworthiness with various measures in order to have better chances of lending.

1. Query your own creditworthiness

In order to improve creditworthiness, it is important to know about the current state of creditworthiness. Once a year, companies and the self-employed have the right to request a free self-disclosure from a credit agency such as Creditreform or Bürgel. The self-disclosure informs about the creditworthiness index and about any existing negative entries, but unfortunately can only be requested in writing.

A qualitative credit report is subject to a fee and contains information on solvency and possible risks. With a paid membership in a credit agency, companies and the self-employed can always be informed about their creditworthiness and receive clues to improve their creditworthiness. Bankenscore.de enables the self-employed, entrepreneurs, and craftsmen to check their creditworthiness free of charge and to correct data if necessary, for this purpose Bankenscore works together with several credit agencies.

2. Keep data up to date

In order to improve creditworthiness, it is important that the data stored with the credit agencies are always up-to-date, as this is the first point of contact for banks in lending processes. To do this, you can enter into a dialogue with the credit agencies or easily update your data online via Bankenscore. Simply upload annual financial statements, business evaluations and comparisons of planned and actual figures on the platform – Bankenscore passes this data on to information on your behalf.

If a business evaluation contains negative figures, you can provide the corresponding explanations. In the event of deviations from the planned figures, the deviations should be justified in the actual figures. Increased costs for personnel and high inventories should be justified, for example with a large order or a tight timeframe for the execution of the orders. It makes sense to give the credit agencies an insight into the order books. This can have a positive effect on the rating.

Up-to-date data helps to build a relationship of trust. Don’t underestimate this and upload your current data now.

3. Do not overdraw existing credit lines

In order to improve creditworthiness, it is important for the self-employed, craftsmen, and companies not to overdraw the credit lines granted by the bank. Together with the current account, the bank grants its customers a current account credit. This credit line should be exhausted to a maximum of 70 to 80 percent. This has a positive effect on creditworthiness and gives companies and the self-employed additional space for unforeseen expenses. Liquidity planning can help not to overdraw the credit line. It provides an overview of the available financial resources as well as of inputs and expenditures. Financial bottlenecks can be quickly identified and you have the opportunity to respond to them.

4. Revenue and earnings planning

Revenue and earnings planning is not only an important objective, but it is also helpful in lending. Banks require companies and the self-employed to have a clear concept before deciding on lending. It is important to regularly check whether the plan specifications are actually achieved. There will always be deviations between the actual figures and the planned figures. It is important that the actual figures are as close as possible to the plan specifications. The business evaluation provides an important basis for the bank when deciding on lending. The business evaluation does not always reflect the current situation. You should therefore prepare the business evaluation for the bank and make appropriate explanations of the figures.

5. Identify possible solutions to problems

Problems with customers and payment defaults can never be ruled out. There may be defects in the goods that cause customers not to accept the goods. Problems with quality management can also occur. It is of no use to you to conceal these problems from the bank. Such problems come to light at the latest in the annual financial statements. The analysts of the banks and credit agencies recognize such problems on the basis of the business figures and follow-ups. It has a beneficial effect on the creditworthiness to address such problems at the credit agencies at an early stage and submit the appropriate solutions. Together with the bank, you can work on a solution to eliminate such problems at an early stage.

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6. Short vendor term

A short vendor term has a decisive influence on the rating. You should therefore react to invoices as quickly as possible. Many self-employed people grant their customers discounts in the event of a short-term payment. These discounts should be exhausted. Not only do they offer a financial advantage because a lower invoice amount has to be paid, but they also help to improve creditworthiness. Fast payment of invoices improves the relationship with suppliers and ensures long-term supplier relationships. It can lead to better conditions at the suppliers.

7. Improvement of the equity ratio

An important criterion for assessing creditworthiness is the equity ratio. The better the equity ratio, the better the rating. Equity provides stability and is available in the long term. Should company insolvency occur, the existing equity can only be used when the creditors’ claims have been met. The equity ratio is the ratio of the company’s equity to total assets. The equity ratio can be improved by creating reserves for important investments and unforeseen expenses, as well as by refraining from profit withdrawals.

To always be liquid and improve the equity ratio, you can also sell all or part of your receivables to a factoring company. With factoring, you get money at short notice. The fees for factoring must be taken into account. Factoring can also be worthwhile for the self-employed and for start-ups to get money quickly.

The equity ratio should be at least 30 percent to ensure solid financing. If the equity ratio drops below 10 percent, it can be difficult to get a loan.

8. Carefully plan investments and pre-financing

Self-employed and medium-sized companies have to invest in order to assert themselves against the competition and to keep their finger on the pulse. If a larger order is pending, pre-financing is often required, as companies and self-employed people have to buy materials and possibly increase the staff. Reserves can help, but they are not always enough. The more reserves there are, the better the equity ratio. In the event of a short-term financial need, you should inform the bank as soon as possible and present the reasons for the financial needs. In order to react quickly to the increased financial requirements, it is important to get a loan as quickly as possible. In this way, companies do not default on the payment of invoices.

9. Checking the creditworthiness of new customers and business partners

Self-employed entrepreneurs can improve their own creditworthiness by checking the creditworthiness of their new customers and business partners. This is especially important for large orders, where companies have to make advance payments and stock up on the necessary material. In this way, companies can protect themselves so as not to get into a fraudster or an insolvent company. Especially for the self-employed and start-ups, a customer’s default can lead to great financial difficulties. Information about the creditworthiness of companies is provided by various credit agencies.

Conclusion

For the self-employed and companies, a good credit rating is important in order to obtain loans. The banks carry out a rating before lending and check the probability of default of the companies. With various measures, companies and the self-employed can improve their creditworthiness in the long term. This includes a constant dialogue with the credit agencies and the bank, the unsolicited presentation of business figures, the improvement of the equity ratio, the creation of reserves, and the information of the bank about increased financial needs. Should there be financial bottlenecks or sharp deviations of the actual figures from the planned figures, the bank must be informed. It is important to submit the appropriate solutions to the bank.