If you’re in business, you’re in the business of being scored. Very few Australian business owners realise they actually have a credit score, which may also leave them in the dark of how their business is perceived by lenders.
What is a credit score?
Your business credit score is a number generated by lenders to evaluate your business in terms of risk factor. Your personal credit history can be one of the factors used – and can become a significant factor for some lenders. If you have a poor personal credit score you will find it tricky to secure a business loan from one of the traditional lenders, such as the big banks. If you are approved – but are still deemed a relative risk – you’ll probably be paying higher interest rates and over a longer term. Frankly, if the top banks see you as a liability they’re not afraid let you know!
This leaves many small business owners in a difficult position. What happens if you’re running a healthy business and you need to borrow to buy additional inventory or renovate? 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 defaulted on payments in the past.
But don’t despair! Recently, the way businesses are assessed for credit risk – especially small businesses – has changed.
Prospa is a good example of the new generation of online lenders providing much needed access to funding for small business owners by taking into account ALL the factors that are relevant to the success – and risk score – of a business. Prospa looks at over 400 different data points to determine the health of a business and generates a ProspaScore. A ProspaScore is a measure of the creditworthiness of your business – not you as an individual. It looks at everything from your P&L and cash flow to whether you have an engaged community on social media, the number of your employees and how many inquiries you get each month.
Why do I need to know mine?
Credit scores matter because lending decisions are based on them. Lenders want to know whether you will pay a loan back fully and on time. It is important not to shy away from discovering your business credit score as it can give you vital insights. By taking an active step in discovering how you rank you can start to assess and work on the factors that make your business a risk to lenders.
Credit scores also matter because they can also be used by business partners when making a decision whether to have a relationship with your business. This can include financial partners like insurance companies and credit card issuers; and commercial partners like landlords, manufacturers, wholesalers and other companies who will exchange goods and services with you.
If you feel you have a good credit history and your business is performing, understanding the major risk factors involved in ‘scoring’ a business can give you good insight into how to grow your business in a way that lenders perceive as less risky. Some factors will be more important than others to traditional and non-traditional lenders, including: the amount of current debt you have, your cash flow, your overall turnover, your payment history, your business liabilities and your general profitability.
You should also actively manage your personal credit score, because it does have an impact on your business score.
What to do if you have a bad credit score.
Taking control of the information available to you is the first step in managing a bad credit score. You should look for incorrect information on your report – it’s important to address any errors as they will affect your ability to borrow money.
Making prompt payments is the biggest factor towards improving your business credit score. Stay out of collections, avoid legal trouble and don’t go bankrupt as these can all negatively affect credit scores. Some factors, like the amount of current debt you have, or lumpy cash flow, can be managed in a reasonable amount of time. Others, like defaulting on loans, may take longer as some lenders will want a solid run of “good history” before they consider you.
Ultimately, knowing this information makes it easier to put a solid business plan together, helping you forecast when you might be eligible for help.
Prospa offers business loans with fixed term between three and twelve 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 to grow your business.