What is credit score and how does it affect your small business?

As a small business owner, there are many roles that you play both from a business perspective and individually that affect the way your business is shaped. An often-overlooked area by small business owners is the health of their credit score. With the change in regulations by the Banking Royal Commission and the implications of the Basel Committee, SMEs in Australia are finding it harder to secure funds for their needs. In such a scenario, having a good credit score is imperative for the future health of your businesses. 

What is a credit score and how is it determined?

Credit score refers to the financial “health” of an organisation. It relates to your SME’s “creditworthiness” which is the financial stability of the business. It reflects on the organisation’s ability to pay back debts, in terms of bills, loans, EMIs or any other financial transactions that are on schedule. In Australia, the credit score ranges from a minimum of 0 to a maximum of 1200 and is based entirely on the credit history of the business. The score is defined into different slabs - a credit score between 622 to 725 is considered “good” to start with. A “very good” score ranges from 726 to 832, and an “excellent score” falls between 832 to 1200.

Based on their financial history, each business is assigned a score taking multiple transactions done by the business in the past into account. Those who are not considered to be good candidates for borrowing are classified as “subprime borrowers”. These borrowers are believed to be more likely to default on a loan and thus are charged a higher rate of interest. The higher interest is levied to compensate for the increased risk of lending to someone deemed to be a higher risk in terms of credit payments.

Those with their credit score in the “very good to excellent” bracket is usually charged a lower rate of interest. As SMEs continue to move away from traditional banks in search of funds, having a robust credit score becomes a valuable bargaining chip with alternative lenders.

A credit score is all-encompassing and can affect everything from obtaining a loan for business expenses to the payment of electricity and other utilities. It also depends on whether you have paid off your EMIs and other dues on time.

How does a credit rating affect small businesses?

Credit bureaus, or credit reporting agencies (CRAs), are companies that collect and maintain consumer credit information. Usually, these agencies conduct the research needed to check credit scores of SMEs. The major CRAs in Australia are CreditorWatch, Compuscan, illion, Experian, Tasmanian Collection Service, and Equifax. Veda Advantage, Dun and Bradstreet and the Tasmanian Collection Service are the biggest in terms of market share.

These agencies measure the financial and earning power of the business, which in turn determines the breadth of potential funding. If your company has a good credit history, you will have more time to repay your loans. This is crucial for a small business in its early stages of growth. Opening up a strong line of credit is essential to help your business expand, but also monitoring it carefully is highly imperative to ensure your business succeeds  in the long run. 

What are the drawbacks of having a low credit score for a small business?

Small businesses intermittently benefit from a line of credit either in the form of a bank loan or from investors. However, a bad credit score shows that the business is not being run smartly or efficiently. Having future investments compromised is one of the most significant drawbacks of a low credit score since getting funding will become a challenge. A higher interest rate loan can seriously impede cash flow for a small business which has dynamic and particular needs. You could also face issues with other areas such as applying for a business credit card or grants just through one round of a credit history check.

How do I improve the credit score of my business?

There are several ways in which you can improve your business’s credit score. The first, of course, is to check your credit score. Many companies overlook this simple step in the early stages of their operation, only to find out, much later that their score is not ideal. Once you have checked your credit score, make sure that all your bills are paid on time, especially if you are using a credit card to make payments. You should also establish credit lines with your suppliers and then make the payments on time, every time. Separate your private payments from your business ones. This way, you can focus only on improving your business credit score. Lastly, prepay your bills whenever possible to ensure a healthy track record.

What are the benefits of a good credit score?

A good credit score will ensure that you are approved for loans by traditional and alternative financial institutions. Not only will you find financing easier, but the terms of the loan will also be favorable. Your business will also enjoy good deals from suppliers if they know that your company upholds its end of the bargain every single time. Think of a good credit score as goodwill. The better the score, the more goodwill your business will enjoy.

How do I check my business’s credit score?

There are several agencies like Equifax and Veda Advantage that offer to check your business’s credit score for a small fee while providing a complete credit report. This check is done on the commercial attributes of your business. However, if you run a small business, OnDeck offers to give you a report on your credit score for free.

Conclusion

Checking and maintaining a good credit score is essential for the growth of any business, especially for a small one. The benefits of a good score can help you expand your business and create goodwill with vendors and suppliers. Be sure to check your score at the earliest.

Tagged in: Credit Score, Credit History, Credit Ratings, Line of Credit, Bad Credit Score, Credit History Check, Small Business Loan, Alternative Lenders, Loan for Small Businesses, Small Businesses, SMEs in Australia, Line of Credit Loans

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