The one number your business doesn’t know
Over 90% of businesses haven't checked their business credit score, which means they're effectively flying blind.
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While awareness of personal credit scores has been rising in Australia, business credit scores – yes, there are credit scores for business – are still woefully ignored by Australian small businesses. According to research from MYOB and small business lender OnDeck, 93% of businesses have never accessed their score.
What's in this guide?
- What is a business credit score?
- How is it different from a personal credit score?
- What impacts a business credit score?
- What can damage your score?
- What else do lenders look at when considering you for a loan?
- What should you do if your credit score is low?
- Where can you get your credit score?
- Improve cash flow
Cameron Poolman, CEO of OnDeck, says the issue is awareness.
"I noticed that when the consumer credit scores became available. At that point, I thought small businesses really didn't know it either and it's just something where there just hasn't been the level of awareness in Australia that there has been, for instance, in the US, where FICO is a well-known score that people know."
CEO - OnDeck
At OnDeck, we're trying to build people's awareness.
But what is a business credit score? What do you do if your score is low? And importantly, how do you find out your score?
What is a business credit score?
It is a number between 0 and 1,200 that is calculated using the information on your business credit file.
How is it different from a personal credit score?
According to Poolman, a business credit score doesn't include the personal information that is used to calculate individual credit scores.
Your company's file will contain:
- Company details. Information on structure and current shareholders.
- Public record information. This will include any legal matters or action taken against your firm by the Australian Securities and Investments Commission (ASIC).
- Personal Property Securities Register (PPSR). Any information the PPSR have concerning your company's possessions will be on your credit file.
"A business credit score has got more of the commercial information, such as registered defaults, potential loan inquiries or any external administration that may be registered against the business, so it's very much the commercial and business attributes of the business," he said.
However, there are some similarities.
"In the same as in the personal space, without any positive credit reporting, it almost accentuates the negative. And so, it is quite difficult to get to build your credit score up again once you've got a negative listing or your score has dropped because you're not getting that positive reporting coming through to increase it," he said.
What impacts a business credit score?
Your business credit score is calculated using the information listed on your company credit file. This information includes:
- Credit enquiries. Your business credit shopping patterns and the type of credit you've applied for can increase your credit score.
- Time in operation. A newer business may be deemed riskier than a business that has been incorporated a longer time.
- Commercial credit information. Loan defaults, judgements, court decisions and external administration.
- Director information. Court judgements, bankruptcies, defaults, external administration segments that are listed on a director's file.
- Personal Property Securities Register (PPSR). Details of any PPSR registrations held on a business are listed in your file.
- Company details. This includes the company structure, legal entity name, business address, directors, shareholders and more.
- Information on the public record. This can include recorded liens, lawsuits, judgements or delinquent taxes.
What can damage your score?
Business defaults and late or missed payments are some of the main contributing factors to a low score.
"Another way the score could be impacted is just by the quantum of applications for credit that you've made," said Poolman. "So if you are asking for credit from a large quantum of different institutions, that will have a negative impact on your score."
What else do lenders look at when considering you for a loan?
The criteria for business loans, and what information will be considered, varies greatly from lender to lender.
"If it's a secured loan, they're looking at the securities that the person has provided, and that might be over particular assets, it could be the business, or it could be the person's home that they're lending against. What's also important is the cash flow."
"We will look through, in detail, a company's cash flow and determine its ability to service the loan that they're looking to get. Other funders will look at profit and loss statements, balance sheets, tax returns. It's different for different funders."
What should you do if your credit score is low?
Poolman's advice to any business that has a low credit score is to order a copy of their business credit report, which they can get for free directly from a credit bureau.
"Once you get that report, you know if it's a default issue. So if I a supplier has defaulted you, you know who it is, and then you could determine whether you're able to settle that issue and then remove that from your file, which will generally increase your score."
If you've found out your business has been flagged as a credit risk, there are a few things you can do to appear as less of a risk to lenders and improve your business's credit score:
- Make payments on time. This is the easiest and most effective way to quickly increase your credit rating.
- Stay away from legal problems. Any involvements with the courts will be highlighted on your credit file and will tarnish the image of your company.
- Keep in touch with your creditors. If repayments are getting out of hand or you are evaluating your financial situation, keeping your creditors or business loans manager in the loop may help your situation down the track.
Where can you get your credit score?
You need to pay to receive your business credit score directly from a credit reporting bureau, such as Equifax, but OnDeck allows small businesses to receive their credit score for free.
Poolman believes that more and more small businesses will be looking to access their credit score because of its importance when applying for loans.
"I think in time, consumers, as well as small businesses, will become more aware of their credit score because it impacts their ability to access credit."
"We want to be at the forefront of different opportunities to help small businesses. We'd say this is one way of doing it."
Improve cash flow
If your business has a few outstanding invoices, invoice financing can help improve your cash flow and get access to funds you need. It's a type of business loan that is secured by the unpaid invoices and comes with reduced risk, no asset requirements or interest payments.
Compare invoice financing products below.
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