If you’re in business, you’re in the business of being scored. Yet very few Australian business owners realise they actually have a credit score. Do you know how your business is perceived by lenders?
What is a business credit score?
A business credit score is a number that helps lenders evaluate your business in terms of risk. It’s important to know that your personal credit history can be used in this evaluation – and it’s a significant factor for some lenders. Those with a poor personal credit score will find it tricky to secure a business loan from a traditional lender, such as the big banks. Even if you’re approved – but deemed a relative risk – you’ll pay higher interest rates over a longer term.
Bottom line: if the big banks see you as a liability, they will let you know!
This leaves many small business owners in a difficult position. What happens to a healthy business that needs a small business loan for additional inventory or renovations? Your personal credit history should not exempt you from being able to borrow to grow your business. The same is true if you have other debt or have previously defaulted on payments.
But don’t despair! The way small businesses are assessed for credit risk has changed.
Alternatives for a credit score boost
Prospa is part of a new generation of online lenders providing much-needed access to small business funding. The approval process takes into account all the factors relevant to the success – and risk score – of your business.
Prospa generates its own credit score which looks at over 400 different data points to determine a business’s health. This score is a measure of the creditworthiness of your business – not you as an individual. It looks at everything from your profit and loss (P&L) and cash flow to your social media engagement, number of employees and how many inquiries you get each month.
Why do I need to know my business credit score?
Credit scores matter because lending decisions are based on them. Lenders want to know whether you can pay back a loan on time and in full, so it’s important to embrace your business credit score as it can reveal vital insights. By understanding how you rank, you can assess and improve the factors that make your business a risk to lenders.
Credit scores also matter because business partners can use them when deciding whether or not to work with you. This might include:
- Financial partners: Insurance companies and credit card issuers.
- Commercial partners: Landlords, manufacturers, wholesalers and other companies that will exchange goods and services with you.
How is credit ‘scored’?
If you feel you have a good credit history and your business is performing well, it’s worth investigating the major risk factors involved in ‘scoring’ a business. Some will be more important than others to traditional and non-traditional lenders, but the key factors include your:
- Current debt.
- Cash flow.
- Overall turnover.
- Payment history.
- Business liabilities.
- General profitability.
You should also actively manage your personal credit score because it does have an impact on your business credit score.
How can you turn around a bad credit score?
Taking control of all the available information is the first step in reversing a bad credit score. Be sure to seek out any incorrect information on your report, as errors will affect your ability to borrow money.
Making prompt payments is the biggest factor for improving your business credit score. Collections, legal trouble and bankruptcy can all negatively impact your credit score. Some factors – like the amount of current debt you have, or ‘lumpy’ cash flow – can be managed fairly quickly. Others – like defaulting on loans – may take longer to rectify, as some lenders will want a solid run of ‘good history’ before they consider you.
The key takeaway is this: having all the information makes it easier to put a solid business plan together, which will clarify when you might be eligible for help.
Prospa offers business loans with fixed terms between 3 and 24 months. We look at the health of your business – not your personal credit score – to determine creditworthiness. Find out how much you could borrow from Prospa and start growing your business.