The business credit scoring system
Like your personal credit score, your business credit score tells lenders a lot about your company. A lender will review your business credit score when they are deciding whether or not to offer you a loan and if you will actually be able to repay this loan. The credit scoring system works differently for small businesses than it does for your personal credit and it's not too hard to figure out. This article will offer insight into the credit scoring system and it will help you to see what you need to be doing differently and how you can improve upon your credit score so lenders see you as a low risk investment.
Understanding credit scoring
Let's begin with what the credit scoring system is and why it is used for businesses. The credit scoring system is used by lenders to see what type of risk your business poses to them. They use it to decide if you can afford to take on a new loan and if you will repay it in a timely manner or not. The credit report will include information about all of the debts your business has accumulated and the experiences you have had with previous lenders. Have you paid your bills in a timely manner and have you had outstanding debts? You are awarded points for repaying a debt. When you pay off debts quickly, you will be rewarded more points. If you have a good track record of repaying debts, it will become predictable to lenders and it's easy for them to judge if you can take on additional debts.
Once the information is gathered, there is a statistical method used to calculate points that reflect your business credit score. Lenders will review the points you have accumulated and will then compare it to your industry average and other companies in your industry to determine the health of your company. The points are added up and then created into a credit score that the lenders can glance at to see where you rank.
The biggest factor that goes into the business credit scoring system is the vendors you work with. Some of them report information in a timely manner while others are slow to report. Before you work with a vendor, always ask them about their reporting procedures so you can get a good idea as to when they will provide information to your credit report. This allows you to know when to apply for loans or when to order a copy of your credit report that will have accurate information on it.
Why do lenders use credit scoring?
When it comes to credit scoring, lenders rely upon it heavily. Although they will want to see a copy of your business plan and other information, they will base a large part of their decision on the credit report. This is because they don't have to work on gathering the information and it shows an accurate history of your companies borrowing abilities and repayment procedures. Credit scoring does provide reliable information to review and it very reliable, which is something that lenders need to have compared to your word and trusting people they haven't worked with. Your word means a lot to you but to lenders, it all comes down to fact and documentation.
How do I improve my business credit?
To make the most of your ability to get a loan, you need to work on improving your business credit. You will need to work on a few things like paying your vendors early. Don't just rely on the due date; pay off the loan early as it shows you are on top of things. Avoid carrying debt month-to-month. You also need to try and avoid too many new credit inquiries.