The number of female entrepreneurs in South Africa is on the rise, with more than 60% of micro-enterprises and 40% of small enterprises in the country owned by women, according to the Small Enterprise Development Agency (SEDA).
But when it comes to getting loans to grow the business, small businesses often find financing hard to come by – and one of the problems is often a poor credit score.
If you have a strong credit score, you’ll generally find it easier to get credit from a range of traditional funding sources, says Garnet Jensen, a senior director at TransUnion Africa. However, poor credit scores are one of the top reasons that entrepreneurs get turned down for business loans.
“Part of the problem is that in South Africa, lenders often rely on the personal credit records of the owners to assess their risk of lending, even though business credit reports are often available. So even if your business is strong, having a good personal credit score remains important,” says Jensen.
So what do you do if you have a low score, but want to get your score back on track to have a better chance of getting loans further down the road?
Here are TransUnion’s top 5 tips:
Check your credit report – and fix any mistakes
Often, consumers have errors on their credit reports that affect their credit scores.
“You can get a free report every 12 months from a credit bureau like TransUnion. Request your report and check for mistakes, such as payments marked late when you have paid on time or negative information that’s out of date,” says Jensen. “You can also request a business report, which allows you to know the credit status of your business. You will be able to manage your business finances better by viewing all your debt and ensuring there are no defaults or judgments against your business.”
Build a record of on-time payments
To fix your credit score, you have to pay your bills on time.
“The biggest influence on your credit score is your account payment history – that is, how you manage your accounts and whether you pay your accounts on time. Focus on paying the full instalment of every bill on time, so you’re offsetting past negatives with more recent positives,” says Jensen.
It also helps to maintain a healthy mix of credit - store accounts, credit cards, home loan, and service contracts such as cell phone accounts - to establish a good credit history.
Live within your means
Your credit utilisation - that is, how much of your credit limit you use - has a significant effect on your score.
TransUnion suggests that you try to keep your utilisation of your current credit facilities to less than 35% of your limit.
For example, if you have a credit card or a store account with a limit of R1,000, try to maintain the amount owing balance at under R350.
Easy on the credit applications
Try not to shop around too much for unsecured credit at the same time. Too many applications in a short space of time have an effect on your credit score, as it sends a signal to potential lenders that there might have been a significant change in your financial circumstances, warns Jensen.
Build records for your personal and business credit profile
Poor admin and record-keeping are a major downfall for many SMEs – and not only when it comes to looking for credit. If you don’t keep sound financial records, it means you’re not going to be able to make good business decisions or properly manage your cash flow.
“Many good businesses go under because of poor record-keeping and an inability to secure funding. Get into the discipline of keeping solid books from the start – you’ll be grateful in the long run,” says Jensen.