As a business owner, understanding your company’s credit score is vital for accessing credit. The better your credit score is, it is more likely banks, suppliers, and other creditors will extend credit to your business.
Understanding Credit Scores
A credit score rates a debtor’s creditworthiness. Thus, a higher score means that loans will most probably be paid back on time. A company with a higher credit score is often viewed as more trustworthy by banks, potentially leading to lower interest rates on offers.
These scores are determined by evaluating past behaviour with credit facilities. For instance, consistently paying bills on time in the past suggests a likelihood of doing the same in the future. Using these factors, a number is generated which represents the overall creditworthiness.
For example, the CTOS SME Score for companies is calculated based on the following factors and weightage:
- Payment history (54%)
- Whether the company/business owner pays loans on time or has missed payments in the past
- Amount owed (11%)
- The number of credit facilities and the amount owed to the banks
- Financial performance (19%)
- The financial performance of the company (balance sheet, profit and loss, cash flow, equity etc)
- Credit mix (8%)
- Types of loan and credit facilities the company/business owner holds
- Pursuit of new credit (8%)
- Whether the company/business owner has been approved for new credit facilities recently
Improving Your Company Credit Score
Boosting your company’s credit score takes time and effort. As a business owner, you need to be proactive and strategic. A healthy credit score brings benefits such as favourable loan terms and better deals on leases or credit instruments.
Here are several tips that you can use to improve your credit score.
Ensure the Company’s Loan Accounts Don’t Fall into Delinquency
Timely payment of your company’s commitments is one of the most critical factors affecting your credit score. If you fall behind on payments, your accounts will be reported as a delinquent account, affecting your company’s credit score. Thus, keeping up with payments will establish the credibility of your business, helping potential lenders determine initial credit limits, credit terms, or risk-based pricing.
Diversify the Company’s Credit
Having a mix of credit types can positively impact your credit score. You should consider having a combination of trade credit, revolving credit, and corporate credit cards, instead of just having one type of debt instrument.
Manage Your Company’s Utilization of Revolving Credit
The amount of credit you use will directly affect your credit score and is a predictor of default risk.
If your company utilizes a lot of revolving credit, a high utilization rate will cause the credit score to go down. Hence, keep your credit utilization low, ideally below 50% of your available credit.
Ensure Your Personal Finances are Healthy
If you’re just starting out in business, banks will use data from your personal accounts to derive your company credit score. For example, the CTOS SME Score will score partnerships and sole proprietors using a blended score of the registered business (ROB) plus the score of each business owner/partner.
Aside from adopting the good habits mentioned here (paying bills on time, low credit utilization etc), it’s also a good idea to keep your personal and business accounts separate. Any missed payments from your personal account won’t affect your business account, and vice versa.
Stay On Top of Your Company’s Credit Score
Improving your company’s credit score is an ongoing effort that demands diligence and strategic financial management. By adopting the strategies above, you can enhance your company’s creditworthiness. Proactively checking your company’s credit score with CTOS not only benefits your current financial status but also sets the stage for future growth and success.
Evaluate your company’s credit score with CTOS reports now!
