Here’s Why You Need To Take Your Business Credit Score Seriously

While most individuals are aware of the impact their personal credit score has on their finances, for one reason or another, most entrepreneurs tend not to give their business credit ratings much thought.

However, having a firm understanding of your company credit score, why it matters, and how to utilise it to your advantage is a simple step that could help make a significant impact on your future business success. This is especially important when running a start-up or a small business since you will almost certainly not have enough cash on hand to cover all of your business expenditures, which means you may need to obtain additional lines of credit to expand your operations.

What is a business credit score?

Your business credit score is a numerical reflection of the creditworthiness of your organisation. The score is calculated utilising information from your business credit report. When evaluating your credit application, lenders use this information to estimate how likely you are to repay them. In general, your business credit score is calculated based on a variety of factors, such as:

  • The length of time in business 
  • Size of business
  • Payment habits
  • Level of outstanding debt and current credit utilisation
  • The total worth of business assets 
  • Histories of bankruptcies, collections, and judgements 
  • Number and frequency of new credit applications

As you might expect, a higher score typically indicates that your company has a history of paying payments at the appointed time and generally handles its finances appropriately, which means that you will present less of a risk to lenders in the future. With that said, let’s look at some of the key benefits of a solid business credit score and why you need to pay more attention to moving forward.

It will be easier to qualify for credit

One of the most significant advantages of having a good business credit rating is that it will be much easier for you to qualify for the credit. In general, lenders are traditionally hesitant to offer loans and other forms of credit to those who have a poor credit history, leading to various problems later down the road. After all, having the ability to access more capital is extremely beneficial when a company is expanding. As a result, neglecting your credit score might severely limit your capacity to grow your business and scale operations in the future.

You’ll get better terms on your credit 

In general, the terms that lenders offer their customers are dependent on the level of risk they are taking on board. If your credit score is high, you will present less of a risk to the lender, and therefore, you will be given a more favourable rate. For example, suppose you compare business overdraft options between a company with an excellent credit score and the other with a poor credit score. In that case, the former may get offered a zero-interest account, while the latter may have to pay upwards of 30% APR. This can make a huge difference in the cost of acquiring credit, especially over the long run.

In addition to this, when your company possesses an excellent credit score, you will have the luxury of being able to shop around and compare quotes between lenders. This will give you the chance to negotiate much lower interest rates, as the banks fight amongst themselves to secure you as a customer. 

You’re borrowing power increases

Just as you will have access to better terms on your credit agreements with an excellent credit score, lenders will also feel more comfortable offering you larger amounts of credit. Increasing your borrowing power can be hugely beneficial if you ever decide to scale up your business operations and expand into new markets since you will have the capacity to boost your cash flow substantially at the time when you need it the most. For example, a business with poor credit may only be able to access a maximum of $2,000 from the bank. In contrast, a company with an excellent credit score and a history of timely payments may be able to access $100,000 (and at a better rate too). 

It separates your personal and business finances

Most of the time, small business owners and founders in start-ups use their finances to help facilitate the day-to-day runnings of their company. While this may seem like a good idea, it can get problematic rather quickly, especially if the owner uses their personal credit score for business purposes. 

If things start to go south and you begin to miss payments, it could seriously affect your personal credit score, which could have profound implications on your ability to acquire credit in your personal life. On top of this, many business owners are forced to leverage personal assets to obtain the capital they need to get the business off the ground. In these cases, you could stand to lose the collateral that was stipulated in the contract, which in most cases is your most expensive assets such as your car or home.

Of course, this isn’t ideal, which is why it’s critical to keep your personal and business finances separate as soon as possible. With business credit, your company debts will be disclosed on your business credit reports, protecting your personal credit rating from any financial hardship that your company may encounter, and vice versa. If anything goes wrong with your business. you’ll have the peace of mind of knowing that your personal assets are safe, and you can go about your day without the ominous threat of losing your worldly possessions.

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