Thinking about your business credit score may not be the most exciting thing to do with your time. However, your credit score is an important number that can impact your business’ success. If you’re left wondering, “why do I have to understand my business credit score?” then look no further.
What is a Business Credit Score?
Your credit score impacts your eligibility for different types of credit or certain financial activities, and influences how much credit products will cost you. Lenders use your business and personal credit scores to assess your creditworthiness — a technique of determining your loan servicing capabilities before approving or rejecting your loan application.
A business credit score is a number or grading that ranges from 0 or F (Poor) to 1,200 or AAA (excellent), depending on the credit reporting agency’s grading system. Your credit file is made up of credit information related to applications for credit, records of overdue debt and bankruptcies, and credit enquiries that show each time you’ve applied for credit.
Your credit history is assessed and scored, detailing your creditworthiness and borrowing power based on your overall financial history.
Why do finance companies check your credit report?
A business credit report is your financial history for up to the past ten years. This gives lenders a good indication of how you run your business and whether they can rely on you to repay debt. Assessing your credit score gives the lender an idea of the level of risk they would be taking on by lending you the credit your business is looking for. A high credit score means you’re likely to repay the money — which means low risk for the lender. A low credit score means you’re likely to default (not pay the money back) — which is a high risk for the lender.
Key reasons to understand your business credit health
It helps you plan for the future
Understanding the credit health of your business is beneficial if you’re planning on growing your business since you will need to figure out how to fund the growth in the future. This also allows you to have an idea as to what finance options are available for you. A low credit score can lead to struggling with traditional financial aid, like a business term loan, or end up with higher rates, which can cost you a lot of money in the future.
It may influence the amount you can borrow
People with a low credit score are unlikely to be approved for high amounts of money to be borrowed. It is not in the lender’s best interest to lend money if this is your situation since the risk of you failing to repay is too high; resulting in the lender losing money, and your business in financial hardship.
In contrast, an ‘excellent’ credit score results in having more favourable lending circumstances since you’re less likely to experience an unforeseen circumstance that prevents you from making repayments. As a result, you’re more likely to get authorised for a larger loan because you’re considered a reliable borrower.
It gives you the opportunity to make changes
Learning about your business credit score can help you identify opportunities to improve your score, and may give you insight into whether it’s a good idea to apply or not — applying for credit too often can significantly reduce your score. If you’d like to know your rating, there are online services where you can access free credit reports.
While your credit score can be a way to gauge your overall business health, it’s only one piece of the puzzle. It’s a great idea to try to keep your score as healthy as possible, but a low score doesn’t necessarily mean your business will be a failure — you just might struggle to get credit!
Benefits of having a good business credit score
Lower interest rates
Having a good credit rating can secure you a better deal or interest rate. The less interest you pay, the faster you’ll be able to pay off your debt and have more money for other business expenses.
Access a wider variety of finance options
With a bad credit rating, your choices will be limited to bad credit business loans that are expensive and rigid. While you may still be approved for some loans, the amount will be limited, and the fees and charges may be excessive.
With a strong credit score, you can have more negotiation power to secure loan terms that suit your needs. Creditors are unlikely to budge on loan terms if you have a low credit score, and you may be left with limited credit choices.
Prepared for the future
You will be better prepared for the future when you have a good credit score. A great business credit score means you’ll be spoiled for choice when it comes to suitable finance products.
From pursuing business growth to improving cash flow, business finance can offer a variety of opportunities. When the need for finance arises, having a good business credit score will be beneficial and provide you with more options for what you can do for your business.