Do you know your Business Credit Score, and how to use it to reduce your business debt?
Why do 96% of businesses fail within 10 years? Because they can’t pay their bills.
In this blog we are going to tell you how your business credit score can help you improve your cashflow and manage your business debt.
Do you even know you have a business credit score? According to a recent study by small business lender OnDeck, as reported by finder.com.au, only 7% of small business owners have accessed their business credit score, and only half of these had checked it in the previous 12 months. Yet credit scores are dynamic, changing regularly, depending on a whole range of things. It’s a safe estimate to make therefore that over 95% of small business owners currently have absolutely no idea of their business credit score.
A good place to start is understanding what your business credit score is, and what can affect it.
What is a Business Credit Score?
Your business credit score is a number that is calculated by specific algorithms to provide an indication of the status of your credit report. A bit like a thermometer indicating with a number, if you might have a fever, which your doctor uses to assess the state of your health. Your credit score is an indicator of the health of your credit report. It provides information on your current, and past relationships with lenders, suppliers or vendors.
It’s a tool creditors use for risk assessment to decide if they want to offer your business credit.
What affects your Business Credit Score?
Your business credit score measures the ability of your business to pay back its debts. There are a wide variety of factors that will affect your business credit score, based on the information that is available on your business. Factors include:
- How long your business has been in operation – in most cases, newer businesses are often deemed more risky than long standing businesses.
According to the Australian Bureau of Statistics, 60% of small businesses fail within the first three years – making them a higher risk than long standing businesses.
- Past Payment Performance – your history of paying your bills on time will affect your business credit score, for better or for worse. If you’ve been late on payments to suppliers or defaulted on payments, this will negatively affect your business credit score. If your supplier reports your positive payment performance, this will improve your business credit score.
- Public Records – Just like with a personal credit score, court judgements or other legal proceedings will impact your business credit score. This is gathered from publicly available information about your business, such as from government departments.
- Previous credit enquiries – research has shown that businesses that shop around more for credit have a higher credit risk, while the type of credit provider being approached is another factor.
- Director information – Previous bankruptcies or court judgements on your directors will impact your business credit score.
This information is collected into a business credit report. A business credit report (also called a credit file or credit history) can often contain much more information than what you’d find in a personal credit report because of the amount of extra public data that’s available about companies.
Are Personal and Business Credit Scores the same thing?
This is a common question from people that have only just learnt about credit scores, and whilst there are some similarities between business credit scores and personal credit scores, they are not the same thing.
Your personal credit score is a numerical number based on the information in your personal credit report. This relates to your own personal ability to pay back debts, and includes information such as:
- Your personal payment history such as the ability to make on-time payments
- The amount of personal debt you have
- The length of your personal credit history
- Your credit limits and
- Hard enquiries on your credit report.
A business credit score relates to any loans, debts or financial transactions made by your business, and measures the ability of your business to pay back its debts.
However, it is important to note that, particularly if you are self-employed or a small business owner, especially if a new company without much of a credit history, lenders may also check your personal credit score when evaluating whether they will do business with you. Your business might have a great credit score, but if your personal credit score shows that you are often late to make personal payments, this might negatively affect your access to business finance.
For more information on how to improve your personal credit score check out this blog.
How could a good Business Credit Score save your business thousands of dollars?
If you are self-employed or a small business, you may be wondering why your business score matters. Small business is big business. Over 99% of businesses in Australia are considered small businesses. 57% of the country’s gross domestic product (GDP) comes from small business. Small business accounts for over 67% of total employment in Australia.
The prevailing lack of understanding around business credit scores is an issue for small business, especially given the size and importance of the sector to the Australian economy.
No one knows better than a small business owner, how important cashflow is to your business. Cashflow is the blood that flows through its veins, keeping the business operational. Without cashflow, a business will die. However, there is a huge disconnect between small business and their knowledge and understanding about how a credit score can benefit (or cost) the business. This lack of awareness could be costing you money.
With a good business credit score, there are so many opportunities available to your business, a healthy business credit score opens doors. It provides access to funding and funding options, demonstrating to lenders and suppliers that you are trustworthy and likely to pay your debts on time or early. Any lender or potential partner can pay to see your credit score to determine if they want to lend you money or otherwise do business with you. So, wouldn’t you like to know what it is before they do?
Let us introduce you to Roger. Roger is the director of a civil contracting business.
He’s completed a few contracts in the past 3 years and has built his business’ great reputation based on his quality of work, delivered in the time frames required. Roger has approximately $750,000 worth of machinery that he requires to deliver his service. Over the last 3 years business has been going well, but he has recently had a main contractor that owed him a vast sum of money go into voluntary bankruptcy, putting pressure on the business cashflow.
- If your business requires credit to access goods or services, then your good credit reputation is critical. Your suppliers may use your business credit score to determine how much credit they extend to you and the payment terms, such as 30 or 60 days. If your credit score is too low, you may be required to prepay or pay cash on delivery (COD). Unfavourable payment terms will harm your cashflow because the gap between when you pay for products and receive payment from subsequent sales will be extended.
Due to some delays on site that were out of Roger’s control, progress wasn’t where he had hoped it would be, and come to the end of the month, when invoices were due, the amount he was invoicing for as completed works, was less than what he had hoped.
As a result, Roger found his payments to suppliers pushing beyond the due date later and later each month. He missed a couple of bill payments – for his office phone that he doesn’t use anyway, and the company credit card, but he made sure he was prioritising the things that kept the money coming in – like wages, machinery, and supplier invoices.
Roger had just received news that he had been awarded two big jobs, to start within a couple of weeks, and was told that once a few last mandatory checks had been completed, he was the front runner for a big government roading contract that would see him out of the hole, and on top of the world. Roger went to speak to his bank about getting finance for another 2 excavators that he would need for these jobs.
- Banks and other lenders look at your business credit score when deciding whether to give your business a loan, the amount of the loan and the interest rate they will offer you. A good business score could save you thousands of dollars.
Roger’s application for finance was declined, as due to the recent history of late and missed payments his business credit score fell short of what the bank required. Roger was disappointed, but he had heard about a finance company that provided finance for businesses just like his. He learnt they could provide finance at 9.5% which was a lot higher than the 2.75% he was paying through his bank for the current machine, but what’s a few % right?
After all, he had looked at hiring what he needed, but as they check his business credit score, that wasn’t an option, and the repayments were still cheaper than hiring.
Roger’s original loan from his bank of $750,000 at 2.75% pa over 7 years, has him making repayments of $9,826 a month for 84 payments. Total interest paid over the life of the loan is $75,358.
His new loan, also for $750,000 at 9.5% pa over 7 years, has monthly payments of $12,258 for 84 payments. Total interest paid over the life of the loan is $279,671.
That’s a difference of $204,313. But Roger is not focused on that, he just needs the machinery to complete these contracts and believes he has no other options.
- If you bid or tender for large projects with government departments and large corporations, they are likely to check your business credit report when considering whether to award a contract to your company. They will filter businesses based on a predetermined minimum business credit score. So, if your business credit score is too low, you will be out of the running in competitive bidding scenarios.
Roger received a call that the manager of the government contract job needed to speak with him, he was excited as this was the game-changer for his business. It was a $10 million contract that he could get completed in 18 months, with an 18% margin. That’s $1.8 million after costs, before tax.
More importantly, it would set him up for life with a reputation as the business to get these jobs done. Life changer!
Roger attended the office to be told that, unfortunately, they had to award the contract to another contractor due to his low business credit score!
Roger’s business credit score has cost him $204,313 in interest payments and $1.8 million in profits from just one job. If only Roger had got in contact with the team at Fix Bad Credit, he could have reduced his debt by $204,313 and changed his life!
How can you improve your Business Credit Score?
If you’ve recently checked your business credit score and you’re not happy with the number in your report – do not worry, there are steps you can take to improve your credit score.
- Take care of your cashflow. Much of your credit score comes down to your cashflow. If you run out of money, you’ll miss payment deadlines and your credit score will go down. So put processes in place to ensure that you’re getting paid on time and be strategic about when you spend money. Consider setting rules around how low you allow your bank balance to get.
- Pay bills on time. This is one of the easiest ways to ensure a good credit score. Make all repayments on time or early to establish good relationships with your different creditors and to improve your credit score. If something affects your ability to pay a bill, don’t be too proud to call that supplier and explain the situation. They’ll be far less likely to report you to a credit scoring company if you explain why you’ll be running late and when you expect to be able to pay.
- Chose a supplier who shares payment data to a business credit agency. Under Comprehensive Credit Reporting, positive payment behaviour will increase your business credit score. If you are confident that you have good systems and processes in place to pay your bills on time, look for vendors or suppliers that are likely to report this. Conversely, be aware that it is bigger businesses or banks that are most likely to report any missed payments.
- Establish credit lines. If your business is new look at establishing new lines of credit with some vendors or suppliers rather than paying cash, as an opportunity to establish a good business credit score – and pay off the debts on time. This demonstrates that you are able to manage each credit account responsibly and will improve your credit score.
- Regularly check your business credit report. When you check your credit score every quarter, you can keep track of how your business is going and areas that can use improvement. You can also look out for inaccuracies in your report that may be inadvertently affecting your score. Even a simple mistake such as the wrong business address can affect your rating. By monitoring your credit report every few months, you can ensure that any mistakes are swiftly corrected. If a vendor reports you for withholding payments for a legitimate reason, such as an invoice dispute, this can be corrected.
How can Fix Bad Credit help?
We strongly advise that you get your business credit score checked before you apply for credit. We will do that for you for free.
We strongly advise any business you rely upon payments from, to check their credit.
Ask us about our service, where we monitor and provide monthly updates on changes in your and your business associates’ credit scores. Roger may have seen a sign that the original contractor was in financial stress before they went into bankruptcy and got out without being owed money. His life would be a different story now if he had done this. We are happy to discuss this service for you.
If you’re thinking about applying for a loan, we suggest you check your business, and your personal, credit score first, so you know you are in a good financial position. After all, any lender or potential partner can access your credit score to determine if they want to lend you money or otherwise do business with you. So, wouldn’t you like to know what’s in there before they do?
Typically, your credit score is negatively affected every time it is checked through a bank or lender. But Fix Bad Credit can do this for you for free, using what is called a “soft enquiry” ensuring there is no impact on your credit score.
If you have any errors or black marks on your credit scores, get in touch with one of our Credit Experts for a FREE NO OBLIGATION CONFIDENTIAL credit review. Once we’ve had a chance to assess your current credit situation, we will provide you with a range of tailored options for improving your credit scores, and if needed, for reducing your debt by up to 90%. It’s our goal to help you get access to the best loans and creditor arrangements possible, saving your business money.