A survey this week by Manta and Nav, revealed that almost three quarters of business owners are unaware of their business credit score, and around two-thirds of business owners weren’t even sure how they’d find it out if they wanted to know. In the same way as lending used to be arranged manually over coffee with the bank manager, and is now processed using sophisticated automation technology and credit scores, business lending, and even contracts are now at stake if your credit score is lower than your competitors.
Why Your Credit Score Matters As A Business
Before we get into how to find your score and practical advice for improving it, you’re probably wanting a bit more depth on why you should care. After all, you find out pretty easily from credit declines as a consumer if you’ve let things slip.
The problem for businesses is that the application process for a big contract, either with a supplier, or as a supplier, is often much more complex, and the reasons for an individual decline is shared with companies less than it is in the more regulated consumer environment. It’s possible that a minor blip, caused by a small unpaid bill that was overlooked, or a dissatisfied customer filing an historic claim that you were unaware of factored into a decision, while at the same time your staff believed it was due to not having spent enough time on the pitch deck, or being out of line on pricing.
How Your Business Credit Score Is Calculated
According to Nav, a Silicon Valley business specializing in collating, aggregating, and delivering business credit scores for free, the main drivers of your business credit score are:
- How you use your existing credit (utilization ratio)
- Your track record when making payments
- The length of historic data available
- Amount and profile of company debt
- Public records relating to bad credit – eg defaults
- Factors relating to the size and revenue of your business
- Risk factors related to your specific industry
The main agencies are Dun & Bradstreet PAYDEX, Experian and FICO. The scores are typically interpreted on the basis of ‘likelihood of payment being received within terms’ with early payers performing the most strongly in the indices.
Advice For Improving Your Business Credit
As you can see from the categories listed above, the factors taken into account bear some thematic similarities with consumer credit scores, but there are many factors which are rooted entirely in the business world. Addressing each of the main factors above can go a long way to boosting your performance.
Pay Existing Credit On Time, And Ensure Records Are Correct At The Main Three Agencies
A long track record of paying on time, combined with the agencies involved having a clear understanding of your business, and up to date records is crucial. Being able to tie all the information they have about you together can help them provide a much clearer picture as to the status of your business.
Pay As Early As Possible When Dealing With Suppliers
If you have trade arrangements, for example, to pay on 30 day terms, you should ensure, where possible, that you always pay on time, or even early. Some suppliers will register that information with the credit agencies, boosting your score. You should, naturally, make sure to include details of all your trade arrangements on the credit reference agencies’ systems whenever that is possible so they can follow up and complete their records where appropriate.
Take Action On All These Points ASAP!
As you can see from the list, the amount of historic data for each category is an important weighting factor. It is much easier for the agencies to be confident that their score is right, and that their customers relying on the scoring to make credit decisions or contract decisions before dealing with you, can rely on their assessment. For that reason taking action now to update records, maintain positive trade arrangements, and make sure they are listed, is going to be a big positive for you compared to getting it done sometime over the next year.
Clean Up Public Records That May Be Problematic
Some law firms specialize in disputing public records that are either incorrectly filed, were not contested originally or which simply shouldn’t be present any more. If you have a chequered trading history with a selection of adverse public data registered against the business, then it could be well worth your while investing in having this reviewed by a professional.
Trade And Grow In A Manageable Fashion
While there isn’t much you can do about the risks inherent in your sector, it’s definitely worth ensuring that your business is registered in the most appropriate category as an error there could affect your score. On top of that you should heed your accountant or finance chief’s advice relating to growing in a manner that doesn’t stretch your cashflow. Taking on too much work such that you’re unable to pay suppliers on time, even just for a year while exceptional growth is achieved, could impact your future credit potential.
Further Reading And References:
https://www.nerdwallet.com/blog/small-business/how-to-build-business-credit-small-business-loans/
http://www.experian.co.uk/business-check/check-my-business.html
https://www.nav.com/business-credit-scores/
http://www.manta.com/resources/small-business-research-ebook/ebook–small-businesses-need-strong-business-credit/
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