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How Does the Credit Score Work for a Small Business (And How to Take Advantage of a High Score)

The business credit score is one of the most important metrics that may weigh heavily on your financial decisions.

The small business credit score has a similar concept to your personal credit score. It indicates a company’s creditworthiness in terms of the risk posed to a lender or another entity that it conducts business with. 

Business credit scores are also usually rated 0-100, in comparison to personal credit scores of 300-850. 

But how does the credit score work for a small business

It’s influenced by a number of parameters. But generally, a company that has no problem keeping up with debt repayments would have a higher credit score. 

And there’s a lot more to it. So, let’s dig a little deeper. 

Business Credit Score – Complete Breakdown

At the most basic, this credit score shows if your company is eligible for a loan. It could also determine if you’re likely to be a good business customer. 

Also known as the commercial credit score, it takes into account the following parameters: 

  • Business credit obligations
  • Payment history (involving both suppliers and lenders)
  • Legal filings (including bankruptcy, judgements, and tax liens)
  • Years in operation
  • Company size and type 
  • Repayment history compared to similar businesses 

Now, this is best illustrated with a real-life example. 

Let’s say you want to finance new equipment purchases. In this case, the lender will consider your credit score among other criteria, such as: 

  • Revenue
  • Liabilities
  • Assets 
  • Profits 
  • Total equipment value (for the equipment loan)

For small business owners, the business credit score check might also take into account personal circumstances. It’s because your professional and personal finance could intertwine. This is why lenders are likely to check your personal credit score as well. 

The silver lining is that this check is no big deal if you’re not in any legal trouble. On the business side, make sure to get rid of outstanding debt and have enough reserve to cover overhead expenses. 

How to Take Advantage of the Business Credit Score

Aside from applying for a loan, a good credit score gives you a range of options, including: 

  • Better terms with vendors – companies with high credit scores may be eligible to pay in instalments or qualify for a net 60 payment term, just for a start. The higher the credit score, the more likely it is for suppliers to extend generous terms. 
  • Better insurance rates – your company’s creditworthiness may result in better deals when buying business insurance. It’s because an insurance agency may also look at your overall financial history, where the business credit score is likely to feature prominently in any scoring system. 
  • Investor appeal – if you have any aspiration for getting funding from venture capitalists and angel investors, having a high credit score could be invaluable. 

Furthermore, qualifying for better loan terms can be crucial for your company’s cash flow. 

With a high score, your company should be more attractive to business partners and vendors. In turn, that will help your business remain competitive and thrive. 

Getting Your Business Credit Score

You can get your company’s business credit score from credit scoring agencies tasked with keeping these scores. 

As mentioned, most agencies use a range of 0 to 100. But some may keep up to three numbers for different areas of your business’s financial position. 

A business credit score of 100 may only be achievable for businesses that pay expenses in advance (usually 30 days). The score may drop to about 80 for businesses that pay on time. Needless to say, it will head south for companies that are late with paying creditors. 

If an agency keeps a set of numbers, one of them could indicate the likelihood of your business failing. Think of it as a future risk assessment with a score ranging from 1,000 to 1,880.

Using Your Business Credit Score

When a vendor considers doing business with your company, how do they know if you’re going to pay on time? 

They’ll check your credit score, of course. And if it’s high enough, the vendor will take you on and might even offer favourable terms. 

Like the personal credit score, business credit scoring is an ongoing process. 

You can subscribe to credit score reports for your company and review them continuously to be sure that everything is on the up and up. 

If your business credit score was to drop all of a sudden, you’d want to take care of it as soon as possible. Preferably before the companies that you do business with find out and want to renegotiate deals to lower the risk on their end. 

Aim for the Highest Score

How does the credit score work for a small business? 

Basically, the system assigns a numerical value to the overall financial health of your business and calls it its business credit score. The score shows if your company is a good potential customer for other businesses and lenders. 

All business owners should keep an eye on the credit score. If it gets too low, it’s an indicator that something might be amiss with your cash flow or liabilities. 

Are you ready to take the next step? Unsecured Finance Australia can help you with business loans that you can use for virtually any purpose, including improving your business credit score. Click here for more information.

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