It is not always easy for the self-employed to get a loan. The credit rating not only has a decisive influence on lending, but also on the amount of interest. The better the credit rating, the cheaper interest is granted. The banks carry out a credit rating check, using various factors and mathematical methods to check the likelihood of a default. Grades are awarded for the rating. Companies and the self-employed can use various measures to improve their creditworthiness in order to have better chances for lending.
1. Make an inquiry about your own credit rating
In order to improve the creditworthiness, it is important to know about the current status of the creditworthiness. Once a year, companies and the self-employed have the right to request free information from a credit agency such as Creditreform or Bürgel. The self-disclosure provides information about the credit rating index and any negative entries that may be available, but unfortunately it can only be requested in writing with great difficulty.
A qualitative credit report is subject to a charge and contains information about 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 get clues to improve their creditworthiness. Bankenscore.de enables the self-employed, entrepreneurs and tradesmen to check their creditworthiness free of charge and correct data if necessary, for this purpose Bankenscore works with several credit agencies such as Creditreform or Bürgel.
2. Keep data up to date
To improve creditworthiness, it is important that the data deposited with the credit bureaus is 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 bureaus or easily update your data online using the bank score. Simply upload annual financial statements, the business analysis and comparisons of planned and actual figures on the platform – bank score passes this data on to you for information.
If a business evaluation contains negative numbers, you can provide the corresponding explanations. If there are deviations from the plan figures, the deviations should be justified for the actual figures. Increased costs for personnel and high inventories should be justified, for example with a large order or a tight time frame 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 impact on the rating.
Current data help to build a relationship of trust. Do not underestimate this and upload your current data now.
3. Do not overdraw existing credit lines
To improve creditworthiness, it is important for the self-employed, craftsmen and companies not to overdraw the lines of credit granted by the bank. Together with the current account, the bank grants a current account credit for its customers. A maximum of 70 to 80 percent of this credit line should be used. This has a positive impact on creditworthiness and gives companies and the self-employed additional space for unforeseen expenses. Liquidity planning can help to avoid overstretching the credit line. It provides an overview of the available financial resources as well as inputs and expenses. Financial bottlenecks can be identified quickly and you have the opportunity to react to them.
4. Sales and earnings planning
Sales and earnings planning is not only an important objective, it is also helpful when 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 planned targets 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. The business evaluation provides important foundations 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. Show possible solutions to problems
Problems with customers and defaults can never be ruled out. There may be defects in the goods, which may result in customers not accepting the goods. Problems with quality management can also arise. There is no use in hiding these problems from the bank. At the end of the year, such problems come to light at the latest. The analysts of the banks and credit bureaus identify such problems based on the business figures and follow up. It has a positive effect on the creditworthiness to address such problems to the credit agencies at an early stage and to present the appropriate solutions. Together with the bank, you can work on a solution to get such problems out of the way at an early stage.
6. Short vendor term
A short creditor term has a decisive influence on the rating. You should therefore react to invoices as quickly as possible. Many self-employed people give their customers discounts on short-term payments. These discounts should be exhausted. Not only do they offer a financial advantage as a lower invoice amount has to be paid, they also help to improve creditworthiness. Fast payment of invoices improves the relationship with the suppliers and ensures long-term supplier relationships. It can lead to better conditions with the suppliers.
8. Improve 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. If there is a corporate insolvency, the existing equity capital can only be used when the claims of the creditors 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 foregoing profit withdrawals. In order to always be liquid and to 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 factoring fees must be taken into account. Factoring can also be worthwhile for the self-employed and for start-ups to make 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.
9. Carefully plan investments and pre-financing
Independent and medium-sized companies have to invest in order to prevail against the competition and to keep up with the times. If a larger order is pending, pre-financing is often necessary, since companies and the self-employed have to buy material and possibly have to increase staff. Reserves can help, but they are not always enough. The more reserves there are, the better the equity ratio. In the event of short-term financial requirements, you should inform the bank as soon as possible and state the reasons for the financial requirements. In order to react quickly to the increased financial needs, it is important to get a loan as quickly as possible. In this way, companies do not fall behind in paying bills.
10. Checking the creditworthiness of new customers and business partners
The self-employed and entrepreneurs can improve their own creditworthiness by checking the creditworthiness of their new customers and business partners. This is particularly important for large orders where companies have to make advance payments and have to stock up on the necessary material. This allows companies to protect themselves so that they do not get caught by a fraud or an insolvent company. A loss of payment by a customer can lead to great financial difficulties, particularly for self-employed and start-ups. Various credit agencies provide information about the creditworthiness of companies.
For self-employed persons and companies it is important to have a good credit rating in order to receive loans. The banks give a rating before lending and check the likelihood of default. Companies and the self-employed can permanently improve their creditworthiness with various measures. This includes a constant dialogue with the credit bureaus and the bank, the unsolicited submission of business figures, the improvement of the equity ratio, the formation of reserves and the information of the bank about an increased financial need. The bank must be informed if there are financial bottlenecks or if the actual figures deviate significantly from the planned figures. It is important to submit the appropriate solutions to the bank.