Credit Scores: What Are They & Why Are They Important for SMEs
As businesses prioritise what they earn, they sometimes tend to overlook what they spend. Credit scores can mean more to an SME than you think, as securing funds in accordance with the changes made by the Banking Royal Commission is becoming increasingly difficult. If such is the case for your business, having a good credit score can make all the difference.
What is a Business Credit Score?
A credit score refers to the financial stability of your business and reflects how capable it is in its ability to repay debts, loans, or any other financial transactions. In Australia, credit scores begin at 0 and can hit a maximum of 1,200. Desirable credit scores are ranged as follows.
- Good: 622 – 725
- Very good: 726 – 832
- Excellent: 832 – 1,200
How is a Business Credit Score Computed?
Scores are computed based on a business’ financial history and transactions. “Subprime borrowers” are businesses likely to default on a loan and can be charged higher interest rates. This makes lending risky, as opposed to SMEs in the “very good” to “excellent” bracket who are charged lower interest rates.
Having a robust credit score can make a business more qualified for a business loan and prove them more capable of paying bills and utilities. Whether or not you pay your EMIs and other dues on time can also influence your credit score.
How Does a Credit Score Impact SMEs?
Major credit reporting agencies (CRAs) in Australia that record consumer credit information include:
- Tasmanian Collection Service
- Veda Advantage
- Dun and Bradstreet
Presenting a good credit history to these companies can prove greater earning power, thus making you more entitled to small business loans. These loans can make an incredible impact on your business in its early stages of growth and allow it to expand.
Drawbacks of a Low Credit Score
Simply put, a low credit score can reflect that a business is financially irresponsible or not being run efficiently. Higher interest rate loans can impact your cash flow and compromise your future investments. Overall, obtaining any form of outsourced funding will be a challenge. It may also make applying for a business credit card or grant much more difficult.
Benefits of a Good Credit Score
A good credit score makes financing easier and gives you a better chance of loan approval under more favourable conditions. Suppliers will be more willing to provide you with good deals knowing you’re able to uphold your end of the bargain every time.
How to Improve a Business Credit Score
Improving your credit score begins with knowing what it is in the first place. You can hire an agency such as Business Loan Experts to provide you with a complete credit report that determines how favourable your numbers are.
The best way to improve your score is to pay your loans and bills on time. Divide your personal and business expenditures and establish a credit line with your supplier. Whenever possible, consider prepaying your bills to enhance your track record.
Ensuring an excellent credit score is an underrated aspect of business growth. It can help expand your business and reinforce goodwill with your vendors and suppliers.
To get a better grasp of business loans in Brisbane, give us a call at Business Loan Experts. We work to help you control your budget and plan finances around your biggest business expenses!