A business credit score, presented as a three-digit number between 300 and 900, indicates an establishment’s creditworthiness. A business credit score below 600 is considered poor and lowers the chances of a loan being approved, while a credit score of 660 or higher is considered excellent and can contribute towards securing a loan with favourable terms. This figure, issued by credit bureaus based on an organisation’s credit history, is what prospective lenders refer to when assessing a credit or loan application.
If you’re wondering how a business credit score is determined, this blog will educate you on what affects a business credit score and shed light on its impact on an organisation’s overall financial health.
Key Factors That Affect Business Credit Scores
The most prominent factors that influence business credit scores include a firm’s payment history, credit utilisation, length of credit history, the types of credit used, recent credit enquiries, and unfavourable public records. Let us take a detailed look at each of these considerations and the impact they have on a business credit score.
Payment history is one of the most important factors when calculating business credit scores accounting for over 35 per cent of the score.
Not honouring the commitment to pay instalments on time by delaying or defaulting on the payments damages a business’s creditworthiness and can severely impact the business’s credit score. Companies must track and adhere to agreed-upon repayment due dates to ensure good credit scores.
As credit utilisation makes up at least 30% of the credit score, its significance can’t be understated. A larger credit utilisation ratio may result from a borrower who repeatedly exhibits bad spending habits, such as spending over their means. Lenders view high credit utilisation as irresponsible and risky financial behaviour, which is why it can damage a business’s credit score.
Length of credit history
Lending institutions view a long and positive credit history favourably, as it demonstrates that a business has a proven track record of making timely payments over an extended period. This can be a significant factor in improving a business’s credit score. It indicates that a prospective borrower is capable of handling credit responsibly. This is why staying credit active and borrowing regularly can positively impact a business credit score, but only as long as payments are consistently made on time.
Types of credit used
A diverse credit portfolio is something that lenders like to see, as timely repayment of various types of credit helps to build trust. This is why a healthy mix of secured and unsecured loans can help boost your business credit score.
Recent credit inquiries
Recent credit inquiries from prospective lenders can drive down a business’s credit score. These kinds of credit inquiries are called hard inquiries and occur when lenders access an organisation’s credit reports to verify their creditworthiness in response to an application for a loan or other credit product.
All hard inquiries show up on credit reports, and too many in a short span of time can damage the firm’s business credit score. It is important to note that when an organisation checks its own credit score, this is considered a soft inquiry that does not affect the business credit score.
Unfavourable public records
Matters of public record can also impact business credit scores. These include publicly available information about a business, including matters pertaining to bankruptcy filings, legal judgements, liens, and collections. Issues such as these can damage business credit scores and stand in the way of securing loans in the future.
Depending on the nature of the issue, unfavourable public records can reflect on an organisation’s credit report for several years. Bankruptcies will appear on a business’s credit report for seven to ten years, paid tax liens remain on the report for seven years, while unpaid liens will stay on the report forever. Legal judgements will reflect on the credit report for seven years from the day of filing, although this can be longer if the judgement is renewed.
The factors that impact a business credit report and, therefore, contribute to calculating a credit score are diverse, encompassing payment history, credit utilisation, credit history length, credit type diversity, recent credit inquiries, and public records.
Payment history and credit utilisation are the most significant factors in determining a business’s creditworthiness, while a lengthy and varied credit history can enhance its credit score. Conversely, excessive recent credit inquiries and unfavourable public records can lower a business credit score. Thus, comprehending the determinants of a business credit score is crucial for maintaining a healthy credit score, obtaining favourable loan conditions, and ensuring overall financial stability.