What’s your business credit score? It’s amazing how many businesses don’t know the answer. It’s even more surprising how many can’t answer a more basic question: what is a business credit score? In fact, research from creditera.com suggests that 60% of SME business owners don’t know their score and half of them don’t even know they have one.
So what is your business credit score, why does it matter, and what can you do about it if it’s not particularly good?
Carl Faulds, Managing Director of Cashsolv, who work with distressed businesses to help them overcome their financial problems, gives his advice on how you can build your business credit in 3 simple steps.
Your business credit score exists from the moment your firm starts conducting transactions. Every time you issue a credit to another business or receive one, your credit score builds. Specialist credit bureaux collect this information and collate it into a score, which indicates your company’s reliability when it comes to credit.
In short, your business credit score is vital to obtaining funding, and Creditera have some even more alarming statistics here. According to them, 20% of businesses have considered closing down in the last year, largely due to financial issues, and more than 25% of entrepreneurs have delayed or abandoned expansion plans because they were unable to find the funding they needed.
Understanding your credit score.
The main credit bureaux include Dun & Bradstreet, Equifax Business and Experian Business. Scores range between zero and 100, with anything above 75 being considered good. Many factors determine your score, with prompt payment of bills being only one. The history of your credit line, the number of credit enquiries you make and the number of borrowing accounts you open and close will also make a significant contribution.
So if you discover your score and you’re less than happy with the results, what should you do next?
Improving your credit score in three simple steps.
One: build your assets. A business with few assets will always struggle to borrow and many encounter serious difficulties during an economic downturn. If you have a strong asset base, you can liquidate some of them to deal with a temporary cash flow problem or use them as collateral for a new loan.
Two: consider involving investors. Every time you borrow, you create a liability for your business. Too many liabilities and you will face problems when you try to sell shares, take a loan or secure a buyer. Instead of taking on liabilities when you need extra capital, consider involving an investor. Investors do not need to be repaid, so the investment is an asset rather than a liability, though of course you will need to sacrifice a proportion of your profits or equity.
Three: Leverage your assets wisely. By using around 30% to 50% of your asset base as capital for new loans, you can benefit from advantageous interest rates and flexible repayment periods. New lenders will be keener to offer secured loans, particularly if you have a good record of paying down debts.
A poor credit score needn’t be a barrier to borrowing.
However, if getting your score above 75 simply isn’t realistic, you should take a look at alternative lenders. Unlike banks, alternative lenders are not particularly concerned with your credit score, due to the range of products they offer.
Asset-based finance, as the name suggests, involves borrowing against the value of your premises, plant or equipment. As this is secured lending, you can expect to benefit from competitive interest rates and can negotiate a lengthy term to keep your monthly repayments down. A panel of lenders can be approached to deliver the best deals and overcome any resistance to lending in particular business sectors.
For emergency business loans, money can often be in your account inside 24 hours. This is an excellent solution if you face a sudden and unexpected cash flow problem and simply need some quick cash rather than a long-term borrowing solution.
Finally, whatever your credit score you can benefit from invoice factoring and discounting. Put simply, this method of financing allows you to borrow up to 85% of the value of your invoices as soon as you issue them. When your customers pay, you then repay the loan and any interest and charges. With invoice discounting, you retain control of your own debtor ledger, whereas with factoring the finance provider deals with all aspects of credit control.
There are advantages and disadvantages to each option: the factoring company will be more experienced in credit control and more likely to secure early payment, thus reducing the interest you pay, but some companies are uncomfortable with the idea of their clients dealing with a third party on outstanding invoices. The decision is likely to rest on the relationship you have with your customers, as well as the quality of your credit control team.