What is a business credit score?

2023 11 blog what is a business credit score

As a small business owner, you might have heard about business credit scores but not fully understand what they are. Essentially, a business credit score is a numerical representation of your company's creditworthiness. Just like personal credit scores, these scores are used by lenders, suppliers, and other parties to evaluate the risk associated with doing business with you. A high score can open doors to better financing options, more favorable terms with suppliers, and overall, a stronger financial standing in the business world.

How does a business credit score work?

Your business credit score is influenced by several factors. These include your company's payment history, outstanding debts, length of credit history, and more. Lenders and vendors use this score to assess how likely you are to repay your debts. This score ranges from 0 to 100, with higher scores indicating better creditworthiness. Understanding the nuances of how this score works can help you make informed decisions that positively impact your business's financial health.

How is a business credit score is calculated?

A business credit score is calculated using various factors related to a company's financial and credit history.

Different credit bureaus may have their own specific models and scoring criteria, but generally, the following elements are considered:

Payment History: This is one of the most critical factors. It includes the timeliness of your bill payments to lenders and suppliers. Late payments, defaults, bankruptcies, or liens can negatively impact your score.

Credit Utilisation Ratio: This refers to the amount of credit you are using compared to the credit available to your business. High utilisation can be a sign of financial distress, whereas low utilisation can indicate good financial management.

Length of Credit History: Businesses with a longer credit history are often viewed as less risky. This includes the age of your oldest credit account and the average age of all your accounts.

Public Records: Any records such as bankruptcies, liens, or judgments against your company can negatively affect your credit score.

Company Size and Industry Risk: Some models consider the size of your business and the risk associated with your industry sector. High-risk industries might affect the credit score negatively.

Financial Performance: Some credit bureaus might consider financial aspects like revenue trends, profitability, and assets of the business.

Debt and Debt Service Capabilities: The amount of debt your business carries and its ability to service that debt are also important.

Payment Trends: This involves analyzing whether your business is paying creditors more slowly or more quickly over time.

Each bureau uses its own algorithm to calculate a business credit score.

Why is a business credit score important?

  • Access to Financing: It can significantly affect your ability to secure business loans or lines of credit.
  • Better Terms from Suppliers: A high score can result in more favorable payment terms from suppliers, which can improve cash flow.
  • Lower Interest Rates: You're more likely to receive lower interest rates on loans and credit lines with a better score.
  • Business Opportunities: Sometimes, other businesses will look at your credit score before deciding to partner with you or engage in B2B transactions.

Is a business credit score different from a personal credit score?

Yes, a business credit score is distinct from a personal credit score. While both scores serve a similar purpose (assessing creditworthiness), they are calculated differently. Your personal credit score is based on personal debts like credit cards, mortgages, and personal loans. In contrast, a business credit score focuses solely on debts and financial behaviors tied to your business. Additionally, personal credit scores range from 300 to 850, which is different from the typical business credit score range.

Understanding and managing your business credit score is a vital part of running a successful small business. By focusing on building and maintaining a strong score, you're setting your business up for long-term success and financial stability. Remember, regular monitoring and proactive financial management are key to keeping your business’s financial health in top shape.

Looking for a business loan?

We understand the unique challenges that small businesses face. We always look at the whole story when considering an application, a far cry from the traditional, inflexible SME finance of the past.

mcl finance has helped hundreds of businesses to survive, thrive and scale - apply today.

Check our loan options