A business credit score is not just a number. It is an integral part of your business, and a driver of overall success. It is a metric that signals clearly to creditors, lenders, and suppliers that your business is trustworthy.
Building your business credit score takes time and a dedicated improvement strategy. It hardly happens overnight. Company Watch has helped hundreds of businesses conduct company credit checks and build their business credit score.
Understanding business credit scores can be complex. Some providers base their scores on sophisticated models, black box, and other proprietary algorithms, but at Company Watch, we pride ourselves on delivering transparent scores so you know the exact factors that contribute to a score. As a starting point, it is useful to know exactly how business credit scores are calculated.
Although there is no guaranteed formula for improving your business credit score, you can implement strategies to positively impact your score over time. In this blogpost, we cover:
- What is a business credit score?
- How are business credit scores calculated?
- Why is a business credit score important?
- How to improve your business credit score
What is a business credit score?
A business credit score is a numerical representation of your company's financial health. It's a crucial metric used by lenders, suppliers, and other businesses to assess your creditworthiness and the financial risk behind lending you money or extending credit.
Similar to a personal credit score, your business credit score is based on various factors, including:
- Profitability
- Liquidity
- Overall financial health
- Your payment history
- Credit utilisation
- Asset funding
Lenders use this information to conduct a risk assessment and determine your likelihood of repaying debt on time.
How are business credit scores calculated?
Business credit scores are often calculated using a complex algorithm that evaluates various data points. These include:
- Credit history: This encompasses a company's payment history, credit limits, and overall credit utilisation. Typically, CRAs will consider frequency and timeliness of payments, the amount of debt outstanding, and the ratio of debt to credit limits.
- Public records: This includes any legal judgments, bankruptcies, or WUPAs filed against the business. These events can significantly impact a company's credit score, as they indicate a history of financial difficulties.
- Demographic information: This refers to basic details about the company, such as its size, age, and industry. These factors can provide context for assessing the company's credit or financial risk.
Additionally, the scoring model may incorporate other factors, such as the company's business age, industry trends, and economic conditions. The exact factors considered will depend largely on the CRA that you use.
At Company Watch, we believe in in-depth and transparent company credit checks. While some providers use basic methods of calculation, we use a sophisticated algorithm to create our business credit reports that are clear and easy to understand, with the option of detailed analysis if needed.
Find out more about what makes a good credit risk solution for conducting internal company credit checks.
Ultimately, a business credit score is a snapshot of a company's financial health at a given point in time. A higher score indicates a lower risk of default, while a lower score suggests a higher risk.
Why is a business credit score important?
Access to financing
A high business credit score can open doors to various financing options, including loans, lines of credit, and credit cards. Lenders are more likely to offer favourable terms to businesses with a solid credit history, reducing borrowing costs and increasing financial flexibility.
Improved supplier relationships
Suppliers often conduct a risk assessment before extending credit or offering favourable payment terms. A good credit score can help build trust and strengthen relationships with suppliers, potentially leading to discounts, extended payment terms, or larger credit limits.
Enhanced business reputation
A strong credit score can enhance a company's reputation within the relevant industry. It signals financial stability and reliability, attracting potential customers, partners, and investors.
Reduced financial risk
A low credit score can increase the risk of financial difficulties, including difficulty obtaining financing, supplier disputes, and even business insolvency. By maintaining a healthy credit score, businesses can mitigate these risks and protect their financial future.
How to improve your business credit score
While there is no guaranteed path to a perfect business credit score, implementing the following strategies can significantly enhance your financial standing and reduce financial risk.
1. Pay invoices and bills on time
Consistent and timely payments are the cornerstone of a strong business credit score. Set up reminders or automatic payments to ensure bills are paid promptly.
2. Maintain low credit utilisation
Keep your credit balances as low as possible compared to your credit limits. High credit utilisation can negatively impact your credit score. Studies have shown that a credit utilisation rate below 30% can significantly improve your credit score.
3. Limit new credit applications
Each new credit application can potentially lower your credit score. Only apply for credit when necessary and avoid excessive applications. A study by FICO found that opening multiple new credit accounts within a short period can lower your credit score by up to 10 points.
4. Pay outstanding debt
A study by TransUnion found that reducing your debt-to-credit ratio by 10% can increase your credit score by up to 20 points. Consider creating a debt repayment plan and allocate extra payments to high-interest debt. A standard debt repayment plan is a 3-step process: assessment of current debts, prioritisation for debt repayment, and allocation of funds.
5. Mitigate financial risks
Implementing financial risk management strategies can indirectly improve your credit score. By reducing financial risks through measures like insurance, budgeting, and contingency planning, you can demonstrate responsible financial practices.
Read our guide on managing financial risk to learn more.
Company Watch offers a comprehensive solution for conducting company credit checks and monitoring business credit scores. Users can easily search for specific companies, obtain detailed credit reports, track changes in credit scores over time, and identify potential risks associated with business transactions. This valuable information can help businesses make informed decisions, mitigate financial risks, and build stronger business relationships.
Key takeaways
- Business credit scores are calculated over a range of data points, including credit history, public records, and demographic information.
- A good business credit score can open up financing opportunities, improve supplier relationships, enhance business reputation, and reduce financial risk.
- There is no guaranteed path to improving your business credit score. However, a few key strategies can significantly enhance your financial standing.
