Odds are that the majority of SMEs are going to need external funding at some point in their lifetime, so knowing your business credit score is pretty important. However, according to MYOB’s SME Snapshot, 93% of business owners have never actually checked their business credit score.
Knowing your credit score and understanding how it works enables you to make more informed financial decisions and improves your ability to access finance. Here’s a quick overview of what credit scores are, what makes a good one and how you can improve yours:
What is a Business Credit Score?
A business’ credit score (or credit rating) is an analysis of its credit report all summed up into one number. Your credit report contains information about your business’ credit history and can include things like:
- How many credit inquiries your business has had.
- Time in operation – a newer business may be more of a risk for lenders than a business that has been trading for a while.
- Company details like legal entity name, directors, company structure etc.
- Commercial credit information such as defaults, judgments and court writs.
- Director information, including bankruptcies, defaults and court judgments.
Unlike a personal credit score, a business credit score does not contain the level of personal information used to calculate individual credit scores.
Knowing your credit score gives you a snapshot of your business’s creditworthiness as well as how lenders, banks and other businesses view your business. Having a healthy business credit score can help you secure better rates with banks and lenders, negotiate better trade terms with suppliers and in some cases, even help you win business contracts with large companies or government entities.
So What is a 'Good' Credit Score?
Pretty much all business owners understand that the higher your credit score, the better. But what actually constitutes a ‘good’ credit score? And at what point should you start getting worried that your credit score is ‘bad’?
Veda (now Equifax) is the largest credit reference agency in Australia and actually has a detailed system of different ‘levels’ for credit scoring. Their scores are based on a scale of 0 to 1,200, ranging from Below Average to Excellent:
While it is true that the higher your credit score the better, having a business credit score in the ‘Average’ or ‘Good’ range is perfectly fine as well. It’s only once your score starts getting on the lower end of the scale, (we’re talking well below 400), that you need to start worrying. Building a good credit score isn’t an overnight job and often businesses will take a while to build up a good score. This is especially true for newer businesses, as it will take time for them to establish a business credit history.
Unlike a lot of traditional bank lenders, non-bank lenders, like Moula, don’t focus solely on credit scores. While it is a part of our lending criteria, we also incorporate accounting data as well as credit scores to give us a better understanding of an applicant’s borrowing ability. This means that we get a better understanding of a business’ overall financial health and borrowing ability and can more quickly and accurately assess our loan applications.
How to Improve Your Business Credit Score
Unfortunately, there aren’t any ‘quick fixes’ you can implement to boost your score and building up a solid credit history takes time. More than anything, building up a good business credit score is about consistency – doing all your regular business financial operations on time rather than doing ‘extra’ things to give your score a bonus.
There are many different things that can positively and negatively affect your credit score, but the main ones to look for to start building up a good score are:
- Paying any bills on time or even paying early if you can. This is the most important: late repayments are one of the biggest factors that can seriously hurt your score.
- Not applying for new business credit cards or loans too frequently. This will result in numerous credit enquiries, which will look bad on your report.
- Not ignoring your ATO debt. This is a big one (and a new one), read more on how ATO debt can damage your credit score.
- Opening a business credit card. Using a separate credit account for your business and personal expenses is great for a number of reasons and can help build your business credit. No debt isn’t necessarily a good thing – developing a credit history with manageable debt is healthy.
While Comprehensive Credit Reporting (CCR or Positive Credit Reporting) is being phased into Australia (albeit slowly), Negative Credit Reporting is still being used by the majority of institutions. This essentially means that assessments are based on any negative spots on an applicant’s credit history, so avoiding these spots is key to a good score.
Credit health is an ongoing process and understanding exactly what’s going to impact your score can help you keep your business finances healthy. With this in mind, you should get a credit report once every 12 months and review it yourself. Look for any mistakes or incorrect information and have it corrected, as errors on your credit file can have a serious impact on your score and your business’ ability to access funding.
Finally, it’s important that you bear in mind that running multiple credit checks on your business can negatively impact your credit score. Read our piece on the Credit Kamikaze to learn more.