The magical world of business credit can sometimes be mystifying. Plenty of business people have heard the terms “credit report” and “credit score”, but many confuse the two, as they always accompany one another in conversations around credit. However, because both play an essential role in the running of your business, it is crucial that you understand the difference between the pair to get a better grasp of how they impact your business.
What is the difference between a Credit Report and a Credit Score?
A credit score is a numerical representation of how trustworthy you are; it is calculated from the information provided in your business's credit report. Credit reporting companies calculate your credit score using unique and sophisticated mathematical models that take into consideration various elements, such as the industry, area and country you operate in, your company’s ownership, affiliates, trading history, legal status and many more relevant factors. As your business evolves, your credit scores will also change to reflect your most current situation and as different credit reference agencies use different modelling techniques, your score could be completely different between one agency and another, but if they are reputable agencies the meaning behind the score will be the same – either you are creditworthy or not. Having a fairly low score isn’t necessarily bad – it could just mean that you are a small business, with a low turnover, so high amounts of credit are not recommended.
A credit report tells others how well or poorly you manage your business's finances. It includes general company information such as size, business trend and the recommended amount that could be lent to you, but most importantly, it can contain financial information such as your payment history; i.e. how well prepared and trustworthy you are to pay your bills and debts. Having payment complaints recorded in your credit report will not reflect well on you or your credit score. Most companies purchase credit reports on their customers at the start of a business relationship so that they can see the potential of how to grow sales with the customer, and also to have all the details to hand eg; address, contact details, directors’ and shareholders’ information – in case things go wrong and they need to resort to debt collection in the future.
But why does business credit matter?
Your credit report and credit score are essential information to lenders like banks and business creditors because they want to know how trustworthy you are and how well you manage your finances.
A good report and credit score will show that you are a trustworthy business that has excellent control over their finances. As a result, you will be able to successfully apply for bank loans and get “credit” or extended time allowed to pay your business expenses —so make sure you actively build up your business credit score!
Once the bank approves your bank loan or you secure a fixed amount of delayed time to pay for goods and services, you effectively increase your spending power and your ability to help your business grow. This can help you:
- Buy more/newer equipment
- Buy more property so you can expand your operations
- Cover unforeseen expenses or emergency cases
- Make long-term investments
- Expand into new markets by launching a new product or service
- Acquire new businesses
An excellent credit report also protects your assets when applying for a business loan. One of the most significant scoring factors in a credit report is your credit history, which is a record showing how your company has managed its debts in the past. Businesses which haven't established their credit history will need a personal guarantee to get approved for a loan. This stipulation exists because there is a lack of evidence that the borrower (your business) is responsible enough to pay off their debts successfully. That is why lenders sometimes require an asset like a deed to a house to serve as collateral—something of equal value that the bank can claim in the case a borrower is unable to repay their loan.
Finally, a favourable credit report with a high credit score is essential in getting better insurance premiums and lower interest rates; they make it easier and cheaper to obtain credit.
Why does business credit matter for lenders?
A credit score allows lenders to easily visualise the risk level of entering a business transaction with a new partner. The ability of our customised CR Score (see below) to help mitigate risk makes it an invaluable tool, especially when expanding into new markets and meeting with unknown business partners.
Whenever you are entering a new business relationship, you'll want to make sure that they are a credible and trustworthy company and that your partnership with them will become a mutually beneficial long-term business relationship.
Where can I access a credit report?
Now, you may be asking yourself: How can I check my (or a potential client’s) credit score?
The answer is right here: Cedar Rose! We offer a free Cedar Rose Scorecard (CR Score) as part of our Business Credit Reports.
How does the Cedar Rose Scorecard work?
The CR Score is an award-winning service that can create an accurate credit score even for companies that have little to no financial data available. That is because we use smart AI technology that we based on a fixed algorithm—which blends several different parameters—to create an accurate score for the company in question.
One of the components that make our CR Score one of the best is that each of the factors that form our algorithm is weighted differently. The algorithm is programmed to assign a value according to how much impact each component has on the business. Each element is given a score to produce an overall rating between 0 and 100, with a credit score of 100 marking a company of minimal risk. Because we score each component individually, we can create a flexible scorecard that adjusts to give a truly accurate and reliable evaluation of a company’s risk level.
With an innovative and adaptive award-winning scoring system that was created by certified analysts with over two decades of combined experience in manual credit risk assessment, you can be confident that our CR Scorecard won't ever lead you in the wrong direction. To instantly and accurately evaluate credit risk for companies in over 230 countries and make informed decisions for the long-term growth of your company, order a credit report on each of your main customers from cedar-rose.com today.
As a special offer for 2020, the year of the #coronavirus #COVID19 #crisis, you can even get up to €400 of FREE credit report downloads with one of our €500 packages – giving you a potential of €900 of credit reports for almost half the price.