What is a business credit score?
In Australia, most people understand how their personal credit scores can affect their lives. Less well known to the general population are business credit scores. Businesses, small and large, can receive credit reports the same way that individuals can. Your business credit score would be a number between 0 and 1200, and it represents how trustworthy your business is. Institutions, such as banks, vendors and suppliers, use this number to decide whether they will lend money to your business, let you open a line of credit or supply you with a credit card.
Personal vs. business credit score
There are some similarities between business credit scores and personal credit scores, but essentially they are not the same thing. A personal credit score includes information such as personal credit usage, history of bill payments, loans, and real estate transactions. It relates to your own personal ability to pay back debts. A business credit score relates to any loans, debts or financial transactions made by your business, and measures the ability of your business to pay back its debts.
How is a business credit score calculated?
Your business credit score is calculated based on the information available on your business, such as; how long the business has been in operation, the type of business and its size, previous credit enquiries, past payment performance, any defaults, judgements or other legal proceedings, and any information that is in the public record. This information is collected into a credit report and, unlike personal credit scores, they are available for anyone to access.
Why does a good score matter?
With a good business credit score, there are so many opportunities available to your business. A higher score shows lenders and institutions that you are trustworthy and likely to pay your debts on time or early. Your score will determine whether or not they will lend or supply to you, and what kind of terms they’ll require for repayment. With a good credit score, you have a higher chance of getting a loan, you are likely to be offered more money in credit, and better terms in repayments and in interest rates. A low score indicates that you might often make repayments late. With a bad credit score, your business is considered risky and you might attract higher interest rates or your loan application may even be rejected. Your score can also determine whether vendors and suppliers will invoice your business Net 30 or Net 60 days.
How to improve your business credit score
If you’ve recently checked your business credit score and you’re not happy with the number in your report – not to worry, there are steps you can take to improve your credit score.
- Establish credit lines. The best way to build up your credit score is to start opening lines of credit, because you’ll need these to give your business the opportunity to establish a good credit score. Take out some loans, open up a line of credit with some vendors or suppliers, sign up for a business credit card and make sure you use it – and pay off the debts on time. This mix of credit shows that you are able to manage each credit account responsibly and will improve your credit score.
- Maintain your credit utilisation ratio. It’s not enough to simply own a number of business credit cards; to improve your credit score, you will need to use those cards and make payments on them. A credit utilisation ratio is the percentage of your total available credit that is currently being utilised. A good ratio is somewhere around 30% or less. A high ratio is a sign to lenders and other institutions that you may be experiencing some form of financial difficulty.
- Pay bills on time. This is one of the easiest ways to ensure a good credit score. Make all repayments on time or early to establish good relationships with your different creditors and to improve your credit score.
- Keep debts low. If you owe money to lots of banks, lenders and other institutions, this could adversely affect your business credit score. Having low levels of debt will ensure you have a lower credit utilisation ratio, which in turn works towards keeping your credit rating high.
- Regularly check your business credit report. When you check your credit score every quarter, you can keep track of how your business is going and areas that can use improvement. You can also look out for inaccuracies in your report that may be inadvertently affecting your score. Even a simple mistake such as the wrong business address can affect your rating. By monitoring your credit report every few months, you can ensure that any mistakes are swiftly corrected.
One final thing to note is that while business credit scores are calculated on the information available on your business, lenders and other institutions may also check your personal credit score when evaluating whether they will do business with you. Your business might have a great credit score, but if your personal credit score shows that you are often late to make payments, this might negatively affect your dealings with lenders.
Check your business credit score today and give your business the best chance to grow.