A business credit score can be an indicator of the financial health of your business, giving lenders an insight into how safe or risky it might be to lend to you. Here are some things you need to know about business credit scores, and how you can check and improve yours.
What is a business credit score?
A business credit score is a number generated by a credit reporting agency to give a sense of the financial health of your business. Banks and other lenders will look at your score when considering most applications you make for credit, as a way of assessing the potential risk they might face from lending to your business. Various credit reporting agencies use various metrics to calculate your score, but generally speaking, the higher your business credit score, the more the potential that lenders may view you as a safe borrower.
What factors go into your business credit score?
Factors that can go into determining your business credit score include:
- Registered defaults: If your business has defaulted on payments to suppliers, or made late payments, this could negatively impact your business credit score.
- Director information: If a director of your business has a history of bankruptcies or court judgements (court decisions that you owe money to a creditor), this could also negatively impact your business credit score.
- How long you have been in business: It may be the case that lenders will view newer businesses that have only been trading a short time as riskier than established businesses that have been around for a long time, especially if a long-established business has a stable credit history.
- Previous credit applications and enquiries: A note will appear on your credit report each time you apply for a credit product, and if you have made a few applications in a short space of time, this may be concerning to lenders, who may interpret this as meaning that you present a risk to lend to.
- Matters of public record: Such things as outstanding tax liabilities, liens that have been placed against you or pending lawsuits can also be reflected on your business credit score.
What does your company’s credit file contain?
Unlike a personal credit file, which contains information about your individual financial standing, a business credit file contains information about the financial standing of your business.
In general, you can expect that your company’s credit file will contain commercial information about the business, including records of such things as loan inquiries and defaults. It will also contain such information as:
- Details of the company’s structure: Information on the structure of the company, including managers and directors, and any current shareholders.
- Public record information: Including legal matters, and any actions taken against your company by the Australian Securities and Investments Commission (ASIC).
- Information about your company’s possessions: Your company’s credit file will also contain information from the Personal Property Securities Register (PPSR), an official government list that shows registered interest over property.
What is a good business credit score?
Different credit reporting agencies will assign business credit scores on different scales. Of the three major credit reporting agencies in Australia:
- Dun & Bradstreet assign a score from 0 to 100. They advise that a score from 0 to 49 indicates a borrower at high risk of late payment, a score of 50 to 79 indicates moderate risk, and a score above 80 indicates low risk.
- Experian also assigns a score from 0 to 100.
- Equifax assigns a score ranging from -200 to 1200. They say that this score is meant to predict the likelihood that a business will have an adverse credit event in the next 12 months.
Why is a good business credit score important?
As with a personal credit score, a good business credit score can be beneficial in a number of ways. According to accounting software company Xero, a good business credit score can help your business in two main ways:
- Suppliers you work with may consider you to be less risky, and may therefore may potentially offer a lower interest rate or other favourable terms
- Lenders may give you access to more favourable interest rates and capital if they view you as less likely to default on your repayments
What can damage your business credit score?
Some key factors that can damage your business credit score include:
- Missed or late repayments.
- Defaults or bankruptcies.
- Court judgements against you.
- A large number of previous applications for credit.
How can you check your business credit score?
There are three main credit reporting agencies in Australia who will keep track of your business credit report, and you may be able to obtain a copy from one of them, although the steps you’ll need to take can vary, and you may need to pay for a copy.
At the time of writing, you can obtain a copy of your business credit report from one of three agencies in Australia:
- Dun & Bradstreet offer a free limited access to key business credit information, or a paid monthly subscription for access to additional information and services.
- Experian will allow you to purchase a copy of your business credit report, and offer additional services for a yearly subscription fee.
- Equifax offer paid access to your business credit report.
How can you build your business credit score?
If you have a low business credit score and are looking to improve it, work out what has been bringing your score down. To do this, you may decide to request a full business credit report from a credit reporting agency, to understand what specific factors might be influencing your score – obtaining your full business credit report will likely come at a cost, but it is a good first step to understanding areas for improvement.
According to Experian, some tips to improve your business credit score include:
- Pay invoices from suppliers on time or early
- Pay off any business credit accounts early or on time
- Work with vendors or suppliers who report to one of the three main credit reporting agencies
- Don’t overspend on business credit cards
- Separate your business and personal credit
What are “soft pull” and “hard pull” credit checks?
Generally speaking, there are two different types of credit checks that lenders may perform when considering your application for a business loan – so-called “soft pull” and “hard pull” credit checks. The former is unlikely to affect your business credit score, but the later may have an effect. Here’s how the two differ:
- Soft pull credit checks: Otherwise known as soft pull inquiries, these are checks that a lender can run to get an overall idea of your financial status without going into depth. These will likely not have an impact on your credit score, but it may be noted on your file that one has been performed.
- Hard pull credit checks: Otherwise known as hard pull inquiries, these are checks that a lender can can to get a more detailed look at your credit report. These are official inquiries and will be noted on your credit report. Too many of these in a short period of time can indicate that you have applied for credit with multiple lenders and have potentially been knocked back, which can lower your credit score. Unlike soft pull checks, lenders require your permission to undertake a hard pull credit check.
What else besides business credit score do lenders consider?
While having a healthy business credit score is certainly an important part of the picture when applying for finance, it is not the only thing that lenders will consider when assessing your application for a loan.
If you are applying for a secured loan, meaning a loan that is backed up by an asset you own, then lenders will consider the asset itself (be it a property, a business or something else) and the value of said asset.
Before giving you a loan, lenders will want to be confident that you can service the repayments, and this means that they are likely to carefully consider your own income and outgoings, as well as the cash flow of any relevant business you run.
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