What is a business credit score?
A business credit score is used to determine a business’s creditworthiness. Put simply, it’s a number expressing the likelihood that your business will be approved for funding - much like personal credit scores.
The key difference, however, is that whilst personal credit scores are private information, business credit scores are considered public information and are available for any potential partners to access.
The scale used to score businesses also differs, with businesses scored from 0-100 and individual scores ranging from 300-850, but they indicate creditworthiness in much the same way. A higher score indicates that your business is more creditworthy and therefore more likely to pay bills on time.
Most people understand the importance of their personal credit scores, but many business owners aren’t aware of just how much their company credit score can impact their ability to access finance and create business partnerships.
63% of US small businesses that applied for nonemergency financing in 2020 were denied the total amount of funding they requested.
Why is a good business credit score so important?
Establish lines of credit with a bank
Most banks, suppliers, and other lenders require businesses to be deemed low or medium credit risk to consider credit applications or extended payment terms. The higher your score, the higher your borrowing power.
Only 7% of small businesses that were deemed as high credit risk reported receiving all of the funding they sought when surveyed in 2020.
Small business owners with a poor business credit score (or no score at all), may have to rely very heavily on strong personal credit history to qualify for any type of credit.
Build trusting business relationships with potential partners
Any potential trade partner may access your credit score at any time to assess the risk of doing business with you. This evaluation comes at a cost that is often passed onto you. If this information is readily available through platforms like Cedar Rose, it decreases the friction of doing business with your company and ultimately improves your chances of establishing new business relationships.
Negotiate favourable terms with suppliers
After you’ve established the relationship, the ability to negotiate favourable terms with suppliers, such as longer payment terms, is intrinsically linked to how trustworthy they deem your business to be. A better credit score is indicative of that trustworthiness.
5 Crucial Factors That Contribute to a Good Credit Score
Business credit scores are based on complex statistical modelling that evaluates multiple aspects of your business history, including:
1) Credit History
Arguably one of the most critical factors is your business credit history. How long have you been in business and accumulating a credit history? How much credit have you accessed in the past and how quickly was it repaid? A strong history of repaying debts indicates that you’re likely to repay them in the future, making you more attractive to lenders or potential partners.
2) Company Revenue and Assets
Higher turnover, stable revenue streams and owning valuable assets such as property are likely to contribute to improving your business credit score.
3) Current Outstanding Debts
Current liabilities in the form of loans and credit cards can have a positive impact on your business credit score when managed correctly.
4) Public Records
Understanding filings that can appear on your public records, such as universal commercial code (UCC) filings, can help you protect your business assets and your credit score.
5) Industry Risk
Certain industries are viewed as riskier than others due to higher perceived failure rates in these industries, including sectors like hospitality. If your business is deemed to be in a higher-risk industry, it’s even more crucial to regularly check your credit score and take measures to improve it.
6) Country Risk
The country in which your business is established will influence how risky or creditworthy it is deemed. Higher uncertainty caused by issues like political unrest or currency fluctuation render businesses in those countries a higher risk for lenders and investors.
For example, Sub-Saharan African countries are deemed some of the highest risk, whilst countries like the UAE or Switzerland are deemed low risk.
7) Directors and Owners
The credibility of directors and shareholders as individuals is also taken into account when assessing the creditworthiness of a business.
Unknown individuals with limited credit, bad credit or negative associations, may negatively impact the business credit score. Whilst companies owned by high net worth individuals or government entities are often viewed as more stable and creditworthy to financial institutions or potential partners.
What measures can you take to improve your credit score?
The most important factor you can control is your relationship with any business partners - lenders, suppliers, and customers alike. Adhering to repayment schedules on debts or payment terms for invoices and paying early wherever possible is essential – particularly for payments that have UCC filings associated with them.
This contributes towards your business maintaining a consistent trail of taking on and repaying credit reliably.
There are no guarantees that any actions you take will directly improve your score. However, the best way to maintain a strong score and conduct business in a way that won’t have a negative impact is by regularly checking your score and understanding the key factors that influence it.
Business Credit Scores - A key component of your business
Maintaining a good business credit score may seem low on your priority list if you don’t need access to finance right now or have potential new partners on the horizon. But it can take 1-2 years to build or improve your credit score, so it will have an impact on your future endeavours.
You can immediately reduce friction for any of your future potential partners by ensuring your accurate business information is readily available to them and that you have a strong credit score to reflect your trustworthiness.
Register your details with Cedar Rose for your free credit check and join our database of over 242 million companies to help your potential partners build trust in you.