Our Proven Guide to Business Credit Scores | 5 Ways

Our Proven Guide to Business Credit Scores 5 Ways

Is your business credit score holding you back? Our guide shows you five important ways to get your credit score back on track. 

This credit score can significantly influence both the accessibility and expense of financing. This impact becomes even more pronounced in the realm of commercial property financing, particularly for investors seeking substantial loans. It is imperative for investors, developers, and managers to comprehend the pivotal role played by a company's financial score in this context.

What is a Business Credit Score?

A business credit score is a numerical representation of a business's creditworthiness. It reflects the credit risk associated with a particular business entity and is used by lenders, suppliers, and other creditors to assess the likelihood of that business repaying its debts on time. Business credit scores are typically generated by credit reporting agencies based on the business's credit history and financial behavior.

Key factors that may influence a business credit score in Australia include:

1. Credit History: This includes the business's payment history, outstanding debts, and credit utilization.

2. Public Records: Any bankruptcies, court judgments, or other legal issues can impact the credit score.

3. Company Financials: Financial statements, including profit and loss statements, balance sheets, and cash flow statements, may be considered.

4. Industry Risk: The type of industry the business operates in may also influence the credit score.

5. Trade References: The type of industry the business operates in may also influence the credit score.

6. Size and Age of the Business: The length of time a business has been operating and its size may be considered in the credit scoring process.

It's important to note that there isn't a single, standardized business credit scoring system in Australia. Instead, there are several credit reporting agencies that use their own methodologies to calculate business credit scores. Some well-known credit reporting agencies in Australia include Equifax, Experian, and illion.

Businesses can request their credit reports from these agencies to monitor their credit standing and take steps to improve it if necessary. A positive business credit score can be beneficial when seeking financing, negotiating credit terms with suppliers, or entering into other financial transactions.

Business Credit Score vs. Personal Credit Score

While personal credit scores are more commonly known compared to business credit scores, both share similarities and differences. The evaluation of company financial risk through business credit scores mirrors the assessment of individual financial risk using personal credit scores. The distinction lies in the application, as business credit scores are employed for commercial purposes rather than personal ones.

Personal and business credit scores typically span from 0 to 1200 — a higher credit score is preferable, irrespective of whether it pertains to personal or business finances.

In some instances, entrepreneurs of new ventures may utilize their personal credit scores to secure commercial loans for businesses that have yet to establish their own credit scores. However, this practice is less common in the realm of commercial real estate, where loan amounts often exceed what individuals can personally guarantee.

Business Credit Score:

Entity Covered: Assess the creditworthiness of a business or company.

Factors Considered:
- payment history with suppliers and creditors
- financial performance and stability
- public records such as bankruptcies or court judgments
- trade references and relationships

Purpose:
- used by lenders, suppliers, and other creditors to evaluate the business's ability to repay debts
- influences decisions related to business loans, credit terms, and other financial transactions

Credit Reporting Agencies: Scores are provided by credit reporting agencies such as Equifax, Experian, and illion.

Personal Credit Score:

Entity Covered: Personal credit scores assess the creditworthiness of an individual.

Factors Considered:
- personal credit history, including credit card usage and loan repayment
- outstanding debts and credit utilization
- public records such as personal bankruptcies

Purpose:
- used by lenders for personal loans, credit cards, mortgages, and other individual credit
- may also be considered by landloards or employers in certain situations

Credit Reporting Agencies: Scores are provided by credit reporting agencies such as Equifax, Experian, and TransUnion.

Distinctions:

Scope:
- Business credit scores focus on the financial health and creditworthiness of a business.
- Personal credit scores focus on the financial health and creditworthiness of a business.

Impact:
- Business credit scores influence business-related transactions and financing.
- Personal credit scores influence personal credit transactions and may impact employment or rental opportunities.

Separation of Identities:
- While closely tied in the case of small businesses or sole proprietors, there is a conceptual separation between personal and business credit scores.

It's crucial for both individuals and business owners to be aware of and manage their credit scores, as these scores can have a significant impact on financial opportunities and transactions. Regular monitoring and responsible financial practices can help maintain or improve both personal and business credit scores.

How Can You Check a Business Credit Score?

Accessing a business's credit score doesn't require permission, a notable departure from the restricted access to personal credit scores. Business owners and investors may find it beneficial to check their company's business credit score for several reasons:

Error Correction: Despite efforts for accuracy, errors may occur in credit reports. Regular checks help identify and promptly rectify any inaccuracies.

Fraud Prevention: Businesses are susceptible to identity theft, potentially leading to fraudulent activities recorded in credit reports. Examining the entire report, not just the numeric score, can reveal signs of financial fraud.

Informed Financing Decisions: Knowledge of the business credit score empowers investors to understand loan program eligibility. It guides them in pursuing appropriate financing opportunities and informs decisions on improving the credit score if necessary, especially for programs with stringent requirements.

Underwriting Insights: Understanding the business credit score proves invaluable during loan underwriting. In case of issues, having this knowledge enables business owners to engage in meaningful discussions with the lender's underwriter.

Businesses can obtain standalone credit scores from agencies like Equifax, Experian, and illion, which offer these scores for free. Continuous monitoring services provided by these agencies allow businesses to keep a close eye on their credit score at any time.

To check their credit score, businesses can simply reach out to the relevant agency, following straightforward and generally uncomplicated steps that vary by agency.

What is a Good Business Credit Score?

Business credit scores are typically measured on a scale that varies between credit reporting agencies. The score ranges and classifications may differ, but higher scores generally indicate better creditworthiness. What is considered a "good" business credit score can depend on the specific scoring model used by the credit reporting agency. Here's a general overview based on common score bands:

Excellent:
- Equifax: 800 to 1,000
- Experian: 800 to 1,000
- illion: 800 to 1,000

Very Good:
- Equifax: 700 to 799
- Experian: 700 to 799
- illion: 700 to 799

Good:
- Equifax: 500 to 699
- Experian: 500 to 699
- illion: 600 to 699

Average/Fair:
- Equifax: 300 to 499
- Experian: 300 to 499
- illion: 500 to 599

Below Average/Poor:
- Equifax: 0 to 299
- Experian: 0 to 299
- illion: 0 to 499

In general, a higher business credit score is advantageous as it reflects a lower perceived risk to lenders and creditors. Businesses with scores in the "Excellent" or "Very Good" range are more likely to qualify for favorable loan terms, credit, and other financial opportunities. It's important to note that the specific score requirements may vary depending on the lender or creditor, and different industries may have different expectations.

Business owners should regularly monitor their business credit scores, understand the factors influencing these scores, and take steps to improve them if needed. This proactive approach can enhance a business's financial standing and increase its access to various financial products and opportunities.

How Does a Business Credit Score Affect Your Business?

Lenders, suppliers and potential business partners use your credit score to assess your company’s financial stability. The higher your credit score, the more likely it is that you’ll be able to meet your financial obligations, honour your credit and repay any loans.

So, having a good credit score isn’t just an arbitrary financial metric – it actually helps you borrow money, fund your growth and find the best customers and suppliers.

How To Improve Your Business Credit Score

Pay your bills on time - paying your bills and debts punctually demonstrates that you’re reliable and improves your creditworthiness in the eyes of lenders and creditors.

Don't use all your credit - keeping your credit utilisation low (ideally 30% or below) showcases that you’re responsible with your business finances.

Don't use multiple credit lines - taking out multiple credit cards and loans can be a red flag for credit agencies and lenders and could underline your credit score

Monitor and correct errors - if you spot any inaccuracies (like incorrect industry SIC or ANZSIC codes), rectify these as quickly as possible to improve your overall credit score.

Maintain long-standing credit relationships - having a longer credit history often demonstrates stability and can help to boost your overall business credit score.

How Can Our Firm Help You With Your Business Credit Score?

Being proactive about improving your business credit score has multiple benefits. Lenders will be more willing to fund your growth, potential suppliers will be more willing to offer trade credit and your bank will be able to see your financial stability and offer better overdrafts etc.

As your adviser, we’ll be happy to review your current credit report and help you find straightforward ways to enhance your existing business credit score. Feel free to reach out to us!

Acro Accounting & Financial Planning (AAFP) offers a one stop solution right from accounting, taxation, financial planning to other business advisory services. As Certified Practicing Accountants (CPA’s) and professional tax advisors, we pride ourselves on being experts with the latest developments relating to business and taxation. We as professional public practice firm, provide high quality taxation and business advice to our clients through a personalised service at competitive rates.

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