Funding growth, expansion, or other working capital requirements are always something business owners think about.
If you are seeking a business loan facility, your business credit score will indicate your ability to repay the loan. In this article, we explain a business credit score, why you want it to be a good score, what influences it, and tips to improve it.
What is a business credit score?
Financial institutions (banks/lenders) use your business credit score as an indicator of your creditworthiness. It is calculated using the information listed on your company credit file.
In addition to financial institutions assessing your creditworthiness, your business credit score can be used by businesses considering working with you, as it provides details on your payment history and if you have made any defaults.
Why do you want to have a good business credit score?
Having a good business credit score improves your chances of being able to secure finance to support and grow your business. It can also help to ensure you receive favourable terms on your loan. Hence, it’s important to ensure your credit score remains positive.
If your credit score is slipping lower than usual, there are ways to improve it.
What influences your business credit score?
Depending on the credit reporting agency, your business credit score will range from zero to 1,000 or zero to 1,200 – the higher your score, the better. It is calculated using:
- Business credit and finance activities
Business payment history, credit enquiries, judgements and defaults, etc.
- Details of your business
Industry, trading history, date of establishment, the size of your business, and so on.
Tips to improve your credit score
Maintain a low credit utilisation ratio
Calculated by looking at how much credit has been used vs how much is available. An ideal credit utilisation ratio is around 15%*. There are various ways to ensure this:
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- Pay your balances
- An increase in credit limit
- New line of credit or other finance facility
- Decrease credit card spending.
Pay on time
Late payments on your bills can impact your credit score. It’s best practice to pay bills on time to improve your credit score and maintain good relationships with your suppliers.
Ensure ATO repayments are up-to-date.
ATO debt can impact your business credit score. The ATO can report businesses that owe more than $10,000 in ATO payments and have a debt that is over 90 days overdue.
Build and maintain strong relationships.
Work with vendors and suppliers – communicate effectively and build a good reputation.
Don’t avoid using credit, but use the credit only when you need it
Think about it – financial institutions have nothing to assess your business on if you avoid using credit altogether. Use credit effectively and efficiently and pay it back on time.
Check your Credit Report and monitor it regularly.
Checking your credit report can ensure you know your score and allow you to see what factors are affecting it.
Financial institutions (and, on some occasions, potential suppliers) use a business credit score to determine your creditworthiness. Whether you are applying for a business loan or other banking facilities, having a good credit score may help you to 1) secure the lending facility and 2) receive good payment terms and rates – reducing the cost of borrowing.
If this article has sparked any questions, please contact your Ledge Finance Executive directly or contact us here, and we will be able to assist.
