Small Business Loans: How To Understand Your Credit Score?
Regardless of the reason you are seeking to get credit, the overall credit score you have will have a major impact on whether you can get it or not.
This is true regardless of whether you’re applying for a home loan, a credit card, a business loan, or any type of personal loan. For this reason, you may want to better understand exactly what your credit score is.
This score is a number that is given based on information kept within your credit file. Providers of credit use the score to help them decide how credit-worthy you are at the time you’re applying for a loan and to help them understand whether or not you will pay the loan back if you attain new debt.
What Are Some Of The Different Ways A Credit Score Is Used?
Credit scores are used for business and for personal loans by credit unions, banks, and other providers of credit to help them make the decision whether they should lend you more money or not. It also helps them determine how much they are comfortable lending you. It can impact how much or how little interest that you pay.
If you are a sole trader in business or if you have a partnership with another person, then it’s quite common for your personal credit score to be used for a business loan. In many situations, a lender will use both the business score and personal credit score when deciding on whether or not to make a loan to a small company.
Because of these facts, we will take a look at both business credit scores and personal scores and what type of impact they will have on your ability to get approval to finance a loan for your business.
How Your Personal Credit Score Is Determined
There are agencies that collect your credit information and they use financial and other personal information they gather to produce your credit report.
Some of the information that can be included on a credit report includes your age and address along with information regarding credit unions you do business with, bank accounts, and even things like utilities. They gather information on how much money you’ve already borrowed and how often you apply for credit.
According to the team at Glen Gilbertson Floor Sanding who use credit within their business “if you have credit cards or loans that are past due or delinquent then that will also be on your report. If you have filed for bankruptcy then that will impact your credit rating as well.”
All of this information is combined to create a credit score or rating. Different agencies use a slightly different scoring system and your score can range either 0 up to 1000, or 0 up to 1200.
The scale represents five different categories that include a score of below average, average, good, very good, and finally is the score of excellent. Average is based on the notion of how likely it is that you would default or file for bankruptcy.
This rating demonstrates that based on your score it is highly unlikely that you would have any events that would do harm to your overall score over the next year.
2. Very Good
The score indicates that there is little chance of any type of negative event happening that would harm your score during the next year.
There is a reasonably good chance that your credit will remain in good standing for the next 12 months.
It’s possible that you could have some negative event that impacts your credit score during the next year.
5. Below Average
There’s a reasonably good chance that something negative will happen that will adversely affect your credit score during the next year.
How Can You Keep Track Of Your Credit Score?
The first thing to understand is that the score changes as your individual financial circumstances change.
This is why it’s highly recommended that you regularly check your credit report and your score. When you do this you need to make sure that the information contained therein is completely correct and make sure that the report doesn’t show any incorrect information.
Sometimes your identity could be stolen and a criminal might get credit using your name and information. To prevent that from happening and to put a stop to it if it does requires you regularly checking your information.
It’s possible to get a free credit report but you need to be aware that there is often a catch. When you get your credit report for free it often requires you agreeing to share credit information to third parties that might advertise to you.
For this reason, you need to read all the fine print before agreeing to anything or giving out your details in exchange for the free credit report. If you do agree to it then you can decide later to unsubscribe or opt out of sharing information with third-party companies.
Looking to find out your credit score? Use ASIC’s official resource here.
Is There Any Way To Improve Your Credit Score?
Your credit score changes as your information changes. Some of the things that can have an impact on your credit score include any time you make a payment late on loans or credit cards. Just the act of applying for a new line of credit will impact your credit score negatively to a small degree. Anytime a creditor gives new information on you to the credit score agency it can have a positive or negative impact depending on what information they provide.
According to the team at Kneadwork Massage, who often rely on their credit score to fund their business, “the way in which you start to improve your score is by looking at your report and finding the areas that can be improved upon. As your situation improves so will your score.”
One of the ways that you can begin improving that score is to start paying your credit cards and loans on time. You also want to pay your mortgage and utilities on time as well.
A simple way to reduce your credit score is to reduce the number of credit cards you have. According to the team at Drink Driving Defence Sydney this will help your score. They say “if you lower the total limit on your credit cards and you reduce your overall debt these are other things that can improve your score. Anytime you can pay your credit card off in full it will help and paying it off each month is best. It’s necessary to be diligent in checking your credit report to make sure there’s no incorrect information on it. If you paid off some debt and your report doesn’t reflect that, then you need to have that information corrected.”
Get Things Started By Getting Your Credit Score
There are several credit reporting agencies that would allow you to get your credit score online for free. You can get it from Equifax, Dun & Bradstreet, or Experian. A quick Google search will give you the web addresses for those agencies. Each will use a slightly different scoring system and so you might want to check them all. Also, go through all your information to make sure it’s correct.
What Is My Business Credit Score?
The same agencies that provide your personal score will also provide your business credit score. They are based on the financial activities and credit of the business. This includes credit inquiries on the business, payment history of loans given to the business, and any defaults or judgements. The overall credit score of a business includes the type of industry the business is in and the overall size of the business and its trading history.
Similar to your personal credit score, the five categories of excellent, very good, good, average, and below average are also applied to your business credit score. The credit score for a business is typically on a scale that ranges from one up to 1200.
According to a recent study, the average credit score for a business is about 769. That puts it in a category of very good. It means that about 80% of businesses score at the level of good or better. About 33% of businesses have an excellent credit score.
Some suppliers that businesses may use might check a company’s credit score to decide how much credit they will give you in supplies even when it’s based on a payment term of 30 to 60 days. If a business has a credit score that’s too low they may be forced to prepay or to pay at the time of delivery.
In some situations, a business could be harmed because of too little cash flow because they may not receive payment for services or products up front and this may make it difficult to get needed supplies or restock the product.
According to the business experts at Max Funding, there is a difference between those looking for funding from governments and those who are not, noting “whenever you’re doing business with the government or big corporations they are more likely to check the credit rating of your business. They may or may not award you a contract based on that rating. They often want to do business with companies that have at least a certain credit score.”
Is It Possible To Improve Your Business Credit Score?
To start building the credit score for your business you need to stop using your personal credit for things that relate to your business. It’s almost certain your business will need to establish a line of credit. If all your credit is personal it won’t help when you need it for the business.
A good place to start is to get a credit card that is specifically tied to the company. When you use it for various purchases then you should pay it off in full at the end of every month.
According to the small business owners at Cessnock Tank Works “all the bills related to your business should be paid on time to build your credit score. Anytime you have a late payment or you miss one then it could result in a poor score. Always keep good relationships with suppliers and vendors. When you have good communications with these companies and you create a good reputation with them then you can often negotiate better trading terms. Some of those companies will report to the credit agencies and if you have a good relationship with them it’s more likely they will report a positive history.”
It’s important to remember that if you don’t check your score you won’t know what needs improvement. It’s also possible that there’s inaccurate information on your report. Just as with your personal score, it’s always important to make sure that your business credit score is correct. It’s also important to remember that the score will change as your company’s financial situation changes.
Ryan Smith is an Australian writer and uni student living in Melbourne. As a Business Management major, Ryan is passionate about business revenues. He also has a love for pets, he regularly takes his pet dog for a walk in the park.