Awareness of personal credit scores has been rising in Australia in recent years. People understand that they need to protect their personal credit score. This will then allow them to get a range of personal loans or mortgages. However business credit scores have been pretty much ignored by most Australian small businesses.
According to research from MYOB up to 93% of businesses have never attempted to access their score.
What is a business credit score?
A business credit score is a number between 0 and 1,200 that lenders use to judge whether you are a good risk or not. The figure is mathematically calculated. This occurs by using information that is available on your business credit file that they can easily access.
How is it different from a personal credit score?
A business score does not include any of the personal information that enables the calculation of a personal credit score.
A business credit score has got more commercial information included. This can include registered defaults, potential loan enquiries or external administration against the business. It takes into account the commercial and business attributes of the business. It does not reflect your personal circumstances.
There are some similarities, though which can make it easier to understand.
As it is in the personal space, so it is with regard to no positive credit reporting. Where you have no credit history it can stress the negative. It is also worth bearing in mind that can be quite difficult to build your business score once you’ve got a negative listing. It may be that your score has dropped because you’re not getting that positive reporting coming through to increase it. Ask your Finance Broker for more information about this.
What impacts a business credit score?
Your business credit score is determined using the information listed on your company credit file. This information will include:
- Credit enquiries. Your business credit shopping patterns and the type of credit you’ve applied for may increase your credit score. Time in operation. A newer business is a riskier proposition than a business that has been in operation for a longer period.
- Commercial credit information. Defaults, judgements, court writs and external administration.
- Director information. Court judgements, bankruptcies, defaults, external administration segments that are listed on a director’s file.
- Personal Property Securities Register (PPSR). Details of any PPSR registrations held on a business are listed in your file.
- Company details. This includes the company structure, legal entity name, business address, directors, shareholders and more.
- Information on the public record. This can include recorded liens, lawsuits, judgements or delinquent taxes.
How is your score damaged?
Business defaults and late or missed payments are three of the main contributing factors to a low score.
In addition to these, the score could be affected by the number of applications for credit that you’ve made. If you are asking for credit from a large number of different institutions, it will certainly have a negative impact on your score.
What other factors do lenders consider?
The criteria for business loans, and what information is usually required varies from lender to lender.
If it’s a secured loan, they will look at the securities that the person has provided, and that might be over particular assets. It may be the business, or it could be the person’s home that they’re lending against. What also plays an important is the cash flow.
A lender will look through, in detail, a company’s cash flow and determine its ability to pay the instalments for loan that they’re looking to get. Other funders will look at profit and loss statements, balance sheets, tax returns. It’s different for different lenders but your finance broker will be able to talk you through these.
What should you do if your credit score is low?
The first thing that any business that has a low credit score should do is order a copy of their business credit report. That can be obtained from a credit bureau.
Once you have that report, you know if it’s a default issue or something else. If a supplier has defaulted you, you know who it is, and then you could determine whether you’re able to settle that issue. Once settled you can then get that removed from your file. That will usually increase your score.
Where can you get your credit score?
You need to pay to receive your business credit score from a credit reporting bureau. These include Equifax, but you may be able to get this information for free.
Improve cash flow
If your business has a few outstanding invoices, you should investigate ways to improve your cash flow. Determine how you can get access to the funds you need. Your finance broker is in an ideal position to advise you and work with you. They will help you get your score to the point that obtaining the finance that you need will be possible.