What is a business credit score and other FAQs

by | Sep 1, 2020 | 0 comments

You’re probably familiar with the personal credit score as a measure of a consumer’s ability to repay a loan. Likewise, the business credit score is a measure of a business’ credit health. When a business needs to borrow money, a creditor will assess the condition of the business’ credit status before issuing terms.

Key points

  • The business credit score is derived from the business’ credit profile in the marketplace.

  • Credit scores for businesses are calculated by commercial credit reporting bureaus that use sophisticated scoring models to assess a business’ creditworthiness.
  • Creditors look at business credit scores to assess the likelihood that a business will pay its bills on time.
  • Credit scores are a summary of more detailed credit information available in a business credit report.

What is a business credit score?

A business credit score is a number (or numbers) that indicate the creditworthiness of a  business. A company’s credit score is calculated from commercial information—mostly financial information—available on its credit file. A business credit score tells creditors how likely a business is to pay its bills on time.

A business credit score is a numeric indicator that is amalgamated from detailed information available in business credit report.

Why do I need to know a business’ credit score?

If your payment terms to customers include trade credit, you’ll want to know upfront the likelihood that your customer will repay you on time. A business credit score provided by a credit reporting bureau will give you a credit assessment based on amalgamated market data.

Traditionally, suppliers seek trade references i.e. testimonials from other suppliers about the buyer’s payment behaviour. The risk with relying on trade references is that you’ll get a snapshot of healthy relationships. But what about the bigger picture?

The business credit score takes out the personal bias and presents you with data-driven analysis.

Get business credit scores with ezyCollect

What does the business credit score mean?

Different credit reporting bureaus present the business credit score in different ways. At ezyCollect, we offer the data from top credit reporting bureau, illion. illion’s credit scoring model provides two credit scores: a late payment risk score and a failure risk score. Two scores for the price of one!

Example of illion Late Payment Risk Score and Failure Risk Score

illion’s late payment risk score predicts the likelihood of a company paying severely late (90+ days beyond terms  in the next 12 months. The score range is 101- 799, where 101 represents the highest risk and 799 represents the lowest risk of delinquent payment.

Illion’s failure risk score predicts the likelihood that a business will seek legal relief from its creditors or cease operations leaving unpaid debts in the next 12 months. The score range is 1001-1999, where 1001 represents the highest risk and 1999 represents the lowest risk of delinquent payment.

What influences the business credit score?

The data used in the statistical analysis are mined from the credit bureau’s commercial database. Every bureau has its own credit score algorithm to calculate a credit score.

Key influencing factors in the illion business credit scores predicting late payment risk and business failure risk include:

  • Trade payment information (e.g. records of payments with vendors)
  • Collections data (e.g. debt collection notices against a company)
  • Company demographic information (e.g. industry type)
  • Director information (e.g. address and date of birth)
  • Public record information (e.g. court records, business status records)

Business failure risk scores are also influenced by company financial information, such as financial records lodged with the corporate regulator. 

What is a good business credit score?

Each credit reporting bureau provides the business credit score differently and offers a range from minimal risk to severe risk. Generally, the higher the credit score, the healthier the credit rating.

As a general rule of thumb, suppliers give credit to companies that have a moderate to minimal credit risk score. They then continue to review and monitor the terms. As a customer’s credit score improves (average to minimal risk), suppliers may extend terms to nurture a healthy buyer relationship.

Paying creditors on time is the best thing that buyers can do to build a good business credit score.

What is a business credit report?

Your business credit report is compiled by a credit reporting bureau from your business’ past and present credit activity. It considers your loans and other borrowings, as well as your repayment history on bills such as water and electricity. The corporate regulator—in Australia, it’s the Australian Securities and Investments Commission (ASIC)—also provides information on business compliance and company financial information. The courts provide information on any court actions and judgements.

The business credit report can be basic or comprehensive. Order a basic credit report for details on the business and its office holders, legal events that occurred in the past 60 months and court actions related to directors.

Order a comprehensive business credit report when you want to know more: historical ASIC data, Personal Property Securities Register (PPSR) and industry average risk scores.

How to improve a business credit score?

Pay bills on time

Past payment performance is a key influence on the business credit score, so it’s important that a business pays its bills on time. Late payments on credit cards, utilities and supplier bills can negatively impact the business credit report and score.

Lower the credit utilisation rate

Lenders don’t want to see that a business has maxed out the credit available to it. It’s better to have more credit available than used. That means a business should pay off its  credit card balances on time, or increase its credit limit so the use ratio is lower, or decrease its credit card spending.

Establish trade accounts

A business credit score can improve when there are positive trade reference attached to its credit file. Positive payment experiences are evidence of a business’ creditworthiness.

Correct errors on the business credit report

A business can check its credit report with any of the major credit reporting bureaus. Some services will offer one free check each year, otherwise there is usually a fee. A business can erase errors on the credit report by providing the bureau with up-to-date and accurate information.

The final word

Suppliers use business credit reports and scores to assess if a new customer is likely to pay their invoices on time. They may trade with high risk customers by accepting only cash on delivery, while offering low-risk customers extended credit limits and longer payment times. 

Get illion business credit scores and reports immediately with ezyCollect’s Credit Insights service

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