24 Mar

Business Credit Scores; What Do They Mean to You?

What is a business credit score?
How are business credit scores measured?
What are the benefits of a good credit score?
Managing your business credit score
Tips For Improving Your Business Credit Score

What is a business credit score?

Businesses, similar to individuals, are also issued credit scores and this applies to corporate, large businesses and small businesses. This score is what determines an organisation’s creditworthiness – i.e. its ability to repay debts. A good credit rating will play a pivotal role in helping your company qualify for loans, term financing as well as buy things on credit – all of which will help expedite growth as well as improve cash flow.Credit-score

Your business credit, although not explicitly referred to as such, is actually an asset and should be grown and protected with the same tenacity as other important assets. That’s because like other important assets, a good business credit score can help make your company a success.

How are business credit RATINGS measured?

Business credit scores are measured by credit reporting companies or bureaus. These are companies that specialise in collecting the financial transactions data of companies through voluntary submissions from creditors, such as suppliers, banks, auto finance companies, and/or credit card issuers. Additional information is also acquired from public records such as court and property records.

The credit reporting bureaus then aggregate this information to come up with a credit score for your company. Because this information will vary with every passing day, your business credit score is also not static and will vary to reflect the data being continuously collected by the credit reporting company.

What are the benefits of a good credit score?

There’re several benefits that your company will enjoy when it has a good credit rating. These include:

  1. Favourable credit terms. Having a good credit rating shows that your business pays its debts on time and, therefore, the risk of default in payment is minimal. As a result, your business is able to access more credit and at better terms due to its lower perceived risk.
  2. Increased financing. Your business will be able to access loans from banks and other lending institutions at lower interest rates for expansion and other uses.
  3. Better valuation of your business. In case you want to sell your business, a good rating can be used as a bargaining chip to increase the value of your business as the credit you have created will be transferred with the business to the new owner.
  4. Ease of renting business premises. With a good credit rating, your business will have an easier time renting commercial spaces for warehousing, stores, and other needs as your credit score assures the landlord that their rent will be paid on time.
  5. Low or no security deposits. Utility companies and other service providers will charge your company low or no deposits for their offerings freeing up money that can be used for other things.

Managing your business credit score

Although it may seem like it is the credit reporting companies that determine your credit rating, the reality is that your business is the sole determiner of how good or bad its score is. There are several things you can do to ensure that your rating is good. These include:

  1. Separating your personal and business credit. This is one of the most common mistakes that many business owners make when it comes to business credit. Your business needs to be registered as a limited liability company or incorporated so that it can legally be identified as an independent entity. This way your personal credit is not entangled with your business credit thus protecting your personal assets. The amount of credit you will also be able to acquire for your business will also increase significantly as companies generally can access larger credit than individuals.
  2. Paying your debts on time. All company debts should be paid before they are due to improve your business credit score. The earlier you pay before the deadline, the greater the impact this will have on your credit score. So stop waiting until the last minute to clear invoices as this could be hurting your score.

You can ensure that payments are made on time by automating payments so that they are debited directly from your business’ bank account or credit card.

  1. Ensuring your creditors report your transactions. Paying on time won’t serve you any good if the transactions are not reported to the credit bureaus operating in your location. Make sure that all your creditors report your information and check regularly to ensure that it is up to date and accurate.
  2. Monitoring your credit profile with the bureaus. Check your credit profile with the different bureaus to ensure that all the information contained there is current and accurate. This will help you catch and correct inaccurate information before it takes a toll on your business credit. Changes to workforce sizes, business phone number, or business location should also be updated when they take place.
  3. Limiting credit utilisation. It sounds counterproductive but limiting your credit utilisation is a sure way of improving your business credit score. Ideally, your credit utilisation ratio should be maintained below 30% to demonstrate that your company is good at managing debts and hence less risky to lend to.

Although it takes quite a bit of effort to grow and maintain a good business credit score, the benefits you stand to gain when you do it successfully are worth it.

Ask how CreditWorks can help your business >

Tips For Improving Your Business Credit Score

Similar to a personal credit score, a business credit score serves as a financial report card that grades the creditworthiness of a business.

Credit ScoreHaving a strong business credit score is key to getting your company approved for financing and trade credit. This makes your credit record one of the most important factors when you’re trying to access financing to support and grow your business.

By taking a more proactive approach, you can influence your business’ credit profile to boost its credit score. Here are five top tips to help you improve your business credit score:

1.    Pay on time. Your business credit score is mostly affected by the payment experience other companies have with your business. Make sure you pay your debts within the deadline set by your suppliers or financiers. Late payment will not only attract fines but will also impact your score negatively if the creditor reports you.

2.    Ensure suppliers and lenders report trade experiences. Check your credit profile at least twice a year to ensure that all your key lenders and suppliers are reporting your payment behaviour. If they don’t, your efforts will go unrewarded as their experiences will not be included in the calculation of your credit score.

3.    Monitor your credit profile. Keep an eye on your credit profile to ensure that all the data appearing there is accurate and up to date. False negative activity that has already been addressed, mistakes by creditors and banks, and accounts that don’t belong to you should be reported to the credit bureau so that the proper corrections can be made.

4.    Keep personal finances in order. Although personal and business credit is separate and distinct, creditors may sometimes look at your personal credit for more information. This mostly happens when a business is just starting out or when it doesn’t have enough credit information available. Make sure that your personal credit is as well maintained as that of your business.

5.    Avoid using credit. It sounds quite contradictory, I know, but using less credit than is available reflects better on your score. For example, if you have a $200,000 business line of credit but only use less than a third of it, your credit utilisation ratio will be low and hence improve your score.

Improving your business credit score is very important to your business as it enables your company to maximise its funding potential and access the most favourable terms possible.

Use Creditworks  to remain informed, and thereby protect my business against potential bad payers, and ultimately minimise the risk of losing money via bad debts.

Ask how CreditWorks can help your business >

About the Author

Alan Johnston
Alan heads up the Information bureau side of the business (CRISworks) as well as providing credit expertise and consultancy to clients in the areas of Credit Management best practices, credit training, Credit Terms of Trade reviews, PPSR education, and pretty much all other credit requirements of clients in need.

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