What is a business credit score and other FAQs

You are likely aware of the personal credit score as a measure of a person’s ability to repay a loan. Correspondingly, the business credit score is a measure of a company’s credit health, hence their capability to repay loans. When a company needs to borrow money, a creditor will assess the condition of the company’s credit status before issuing terms and one of the effective ways to do this is to review their customer’s business credit score range.

Key points

• The business credit score is derived from the business’ credit profile in the marketplace.
• Commercial credit reporting bureaus assess a business’ creditworthiness using sophisticated scoring models.
• Creditors look at credit scores to evaluate a business’ likelihood of paying its invoices on time.
• Credit scores summarise 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 signifies the business’ creditworthiness. A business credit score range is based on data from its commercial credit file, which contains financial information. This number tells creditors how likely a company will pay its invoices on time. A business credit score is a numeric indicator amalgamated from detailed information available in the business credit report.

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

Suppose you offer your customers trade credit as part of your payment terms. In that case, you’ll want to know upfront their credit health, i.e. the probability that your customer will repay you on time. A business credit score provided by a credit bureau will give you a credit evaluation based on combined market data. It is common for most suppliers to solely seek trade references (i.e. testimonials from other suppliers about the buyer’s payment behaviour) as credit assessment information. However, the risk with relying on trade references is that you’ll only 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?

There can be many interpretations of a business credit score as different credit reporting bureaus present the business credit score range in different ways. At ezyCollect, we offer the data from the top credit reporting bureau, Experian. Experian’s credit scoring model provides two credit scores: a late payment risk score and a failure risk score. By providing these data, you get a clearer picture of the business risks from your customers.

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

Company financial information also influences business failure risk scores, such as financial records lodged with the corporate regulator. 

What is a good business credit score?

Each credit reporting bureau presents the business credit score differently and the credit score ranges from minimal risk to severe risk rating. Generally, the higher the score, the healthier the credit rating. As a general rule of thumb, suppliers give lines of credit to companies with a moderate to minimal credit risk score. They then keep reviewing and monitoring the terms. As a customer’s credit score improves (average to minimal risk), suppliers may extend terms to foster a healthy buyer relationship. Good payment behaviour is an integral part of credit risk assessment. Paying creditors on time is the best thing that buyers can do to build a strong business credit score.

What is a business credit report?

A credit reporting bureau puts together your business credit report based on your company’s past and current credit activity. They consider things like loans and other borrowings and your repayment history on bills such as water and electricity. The corporate regulator also provides information on business compliance and company financial data. The courts provide information on any court actions and judgements. The business credit report can be basic or comprehensive. A basic credit report includes details on the business and its officeholders, legal events that occurred in the past 60 months and court actions related to directors. A comprehensive business credit report, on the other hand, provides you with more information: 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 behaviour is a crucial influence on the business credit score, so a business must pay 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 would much rather see that a company has plenty of available credit rather than that it has maxed out its credit. This means a business should pay off its credit card balances on time, increase its credit limit so the utilisation ratio is lower, or decrease its credit card spending.

Establish trade accounts

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

Correct errors on the business credit report

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

The final word

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

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