WHAT DOES YOUR BUSINESS CREDIT SCORE MEAN TO YOU?
The majority of us are pretty familiar with the general concept of consumer credit, but if you are a business owner, familiarising yourself with business credit is extremely important for the overall success of your business. That’s because establishing and maintaining a good business credit is crucial for building valuable relationships – with suppliers, vendors, financial institutions, manufacturers, etc. – that are important for your business operations. The “value” of your business credit is presented as a score. Generally, the higher your business credit score, the better your ability to acquire credit – it demonstrates your ability to pay your debts. A good business credit score will help your business qualify for trade credit, financing or loans – all of which are essential for growing your business and improving cash flow. Think of your business credit like any other business asset: if you maintain it well and use it judiciously, it can play an instrumental role in increasing the success of your company.
Who assigns business credit scores? Business credit scores are assigned by credit reporting bureaus or companies. These are organisations that specialise in collecting data about the financial transactions of companies through voluntary creditor submissions from entities such as credit card issuers, auto finance companies, suppliers and/or banks. They also gather other relevant information from public records such as property and court records. How do they assign your business a credit score? Once the credit reporting companies gather all this information, they aggregate it and use special algorithms to come up with the appropriate credit score for your business. The score you are assigned will always
keep fluctuating as data about your transactions continuously streams into the bureaus’ databases – hence the need for maintaining your credit score.
How do you establish business credit? Of course, before you can be assigned a business credit score you’ll need to establish credit for your business. Many businesses (predominantly small businesses) fail to do this and instead rely on the proprietor’s personal credit; which is a big business mistake as it limits the amount of credit you can access. Here are the steps for establishing credit for your business: 1. Incorporate your business. When you incorporate your business, you effectively make it a separate entity from yourself. Unlike partnerships and sole proprietorships, corporations have a legal separation with their owners which means that the assets of the owner are legally separated from those of their business. 2. Open a bank account for your business. To establish business credit, your business requires at least one reference from a bank. Open a bank account and start using it for all your business transactions. Also, apply for a business credit card using your business’ account to start developing a credit history. 3. Register your company with credit reporting bureaus. The next step is to find out the credit reporting bureaus operating in your area and registering with them. This way they can start collecting data about your business. If you already have a profile, go through it to ensure all the information on it is accurate – this is very important. 4. Develop a credit history for your business. The simplest way of building a credit history is through your suppliers. Establish credit lines with your suppliers and start using them. Make sure the suppliers report all your business transactions to the credit reporting bureaus to build your history. Positive reports will help grow your business credit score while negative reports will impact it negatively. So make sure you always pay your debts on time.
How do you maintain a good business credit score? As mentioned earlier, your credit score keeps fluctuating depending on the information being provided to the credit reporting bureaus by your creditors. So it’s important to actively manage your business credit to maintain and/or improve your business credit score. Here are 5 things you need to do to ensure your business maintains a good credit score: • Maintain good personal credit. Although your business and personal finances are legally separated once you have incorporated your business, your personal credit can sometimes be called into question – especially if the credit history of your business is not long enough for an accurate evaluation. So keep your personal finances in order by paying your debts on time. • Pay your company debts on time. You need to ensure your company’s debts are paid on or before their due date to maintain and improve the credit score of your business. The more days before the deadline you pay, the bigger an impact it will have on your business credit score. You can have your payments deducted directly from your credit card or bank account to ensure you are never late.
• Make sure your creditors are reporting your transactions. Paying on time is just one part of the equation, you will also need to ensure that your creditors report this information to the credit reporting bureaus. Check regularly and remind the ones that are not reporting to forward the information. • Monitor your business’ credit profile. Keep an eye on your business credit profile to ensure that all the information entered is true, current and accurate. If you notice mistakes, follow up and have them corrected as soon as possible to ensure they don’t negatively impact your score. Also make sure to keep information pertaining your business such as location, phone number and the number of staff up to date at all times. • Maintain a good credit utilisation ratio. Always ensure your credit utilisation remains significantly lower than your credit limit – ideally below 30%. Over-reliance on credit could raise red flags that could see your credit score take a hit.
What are the benefits of a good business credit score? Having a good business credit score will give you the following benefits: a. Favourable terms on loans, credit and some types of insurance because of the perceived lower risk of lending to your business. b. Increased credit limits from banks and other lending institutions. c. A higher valuation for your company as business credit is transferable if you decide to sell the business. d. It will make it easier to rent premises for your business due to the trust that comes with a high business credit score. e. You’ll pay lower or no deposits when acquiring services from companies that usually require you to pay a deposit. A good business credit score improves your company’s image, increases your business’ credit capacity and enables you to acquire credit and loans on friendlier terms. For this reason, managing business credit should be a priority for all businesses regardless of their size.