In this guide to the benefits of business credit; we explain what business credit is, outline the factors that are used to determine business credit, and detail the benefits of having good business credit.
Most of us are well acquainted with the concept of personal credit: it’s a financial information reporting system that keeps track of your financial transactions to calculate your creditworthiness to lenders. Having good personal credit makes it a lot easier for you to buy a home, rent an apartment and sometimes to even get a job. But did you know that businesses also have a somewhat similar credit rating system?
Business credit works quite the same way personal credit does. Entities, known as credit reporting bureaus (or CRBs), collect information about your business’ financial activities and use it to score the creditworthiness of your business. Lenders, vendors, suppliers and other interested parties rely on reports from these bureaus to determine whether they’ll lend to your business and at what terms.
Having good business credit is essential for acquiring the money and resources you require to run and grow your business. As such, it’s in every business owner’s interest to establish and build good business credit without delay.
Business credit, sometimes referred to as commercial credit, is tracked by credit reporting bureaus (CRBs) on behalf of lenders. Upon request by an interested party (and usually for a fee), a CRB will provide a credit report – that includes your business’ credit score – indicating whether your business presents a low or high credit risk.
While each credit reporting bureau has its own credit-report-generation and credit-scoring methods, all of them rely on several common factors to determine your business credit rating. These are:
- This includes information such as the size of your business and the duration it has been in existence for.
- Your business’ industry. Each industry comes with its own unique set of innate financial risks which CRBs take into consideration when assigning you a business credit score.
- The payment habits of your business. Your business’ debt repayment history forms a good basis for predicting its future payment trends and is used in determining business credit.
- Outstanding balances. This is the money your business currently owes to financial lenders and other creditors.
- Credit utilisation. This is the percentage of credit you’re currently using relative to your credit limit.
- The number of credit inquiries and applications. The rate at which you apply for and inquire about credit affects your business credit rating.
- Delinquent financial behaviour. Delinquent financial behaviours that appear on your business profile such as liens, bankruptcy, judgements and collections are also used to determine your business credit.
After collecting this information from different sources – including voluntary reporting by your creditors – credit reporting bureaus generate credit reports that detail your credit risk and often include a credit score for your business in it.
By managing the above-mentioned aspects of your business’ finances (with the exception of the things that you can’t change such as industry and demographics), you can build and improve your business credit rating.
There are numerous benefits of having good business credit. These benefits are:
- Easier access to loans and credit
One of the greatest benefits of having a good business credit rating is the ease at which you can access loans from banks and other financial institutions. Lenders are generally reluctant to lend money to businesses that have a poor track record of debt repayment as they aren’t assured of the business’ ability to pay back on time or even pay at all.
Having good business credit will also give you access to trade credit from vendors and suppliers allowing you to buy now and pay later – saving you cashflow related headaches. The better your credit score, the more equipment, materials, inventory and services you’ll be able to access without having to pay upfront.
A business that has an exemplary business credit rating will be able to access bigger loans and more trade credit as institutions can trust them to keep their end of the deal.
- Better loan and credit terms
Qualifying for a loan, while it might feel like a victory in itself, is only one part of accessing financing. That’s because loans have to be priced in order to make a return for the financier. This pricing is referred to as interest. Businesses that have a good credit rating will generally be charged lower interest rates when borrowing money as their lower perceived risk makes them more attractive to lenders.
Additionally, a good credit rating gives vendors and suppliers the confidence that you will clear your outstanding invoices in a timely manner. As such, they will be more willing to give your business longer repayment times on products bought on credit which gives you more financial wiggle room.
- Personal credit separation
Having good business credit means that you don’t need to rely on your personal credit to get financing for your business. This will help you create a separation between your personal finances and credit with that of your business.
Separating your business credit from your personal credit will ensure that your personal credit is not shredded if your business runs into turbulence or fails. Moreover, a business can access 10-100 times more financing as compared to an individual which means that your business will be able to access bigger loans than you ever could.
- Improved business reputation
Businesses and people alike prefer to deal with companies that are trustworthy. Having good business credit demonstrates to customers, vendors, suppliers, partners and other stakeholders that your business can be trusted to honour its obligations.
Customers and other businesses that are looking to enter into long-term deals with your company will also be looking for some indication that your business will be in existence for a long time. A good business credit rating is one of the key indicators of a healthy business.
- Better business valuation
Although rarely referred to as such, good business credit is an asset that can be converted into cash if need be. A business with good credit can access funding without requiring third-party intervention which is a great advantage.
If you want to sell your company, having good business credit will increase its value as the buyer will be assured that the business can access credit at favourable terms for upcoming projects or for expansion if needed.
While building good business credit takes time and effort, ensuring that your business has a good credit rating is critical to its growth and success. And the best time to start doing it is now!
For more information visit: https://www.creditworks.co.nz/