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.