1.9.2021

How to Build Business Credit, How it’s Calculated & Why it Matters

Written by Aine Hendron

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Just as boosting your own credit score is important for achieving your personal life goals, looking after your business credit score can help you achieve your business goals. Accessing funding can make the difference between a surviving business and a flourishing business.

There are some industries that rely heavily on credit scores. While that’s not the case for every business, growing your credit rating is still extremely important for any company that hopes to expand in the future, or that ever seeks to secure a small business loan or funding.

We delve into what exactly a business credit score is, and why it matters. We also look at how business credit is calculated, and give you practical advice on how to build business credit. Keep reading to learn how you can financially unlock your business’s ultimate potential.

What is business credit?

A business credit score works very similarly to a personal credit score. The score itself is a rating that lenders use to understand how likely you are to pay back (or not pay back) a loan or money spent on a credit card. Businesses are rated from 0 to 100, 100 being the best score possible, 0 representing a very high risk of default on a loan. Your credit score is calculated by Credit Reference Agencies (CRAs) through the form of credit reports.

The main credit reference agencies in Australia and New Zealand are Experian, Equifax and illion (formerly Dun & Bradstreet) [1].

If you’re a sole trader, lenders will use your personal credit score to determine your creditworthiness, but if you set up a limited company you can build your business credit rating independently [2]. 

Why does having good business credit matter?

A score of 75 or above is typically acceptable and viewed as good [3]. Business credit impacts all aspects of applying for additional funding, such as a loan, government bursary, or investment into your business. Online personal credit history, the credit history and scores of all business entities are publicly available. So, before signing a contract with a new business partner, or creating an order with a different supplier, you should check who you're doing business with first. Likewise, other businesses will check your credit reports and make decisions based on that, too. 

Your businesses credit score can impact things like:

  • How much you’re able to borrow from a lender
  • The interest rate on the loan
  • Whether or not you will be granted business insurance
  • Your eligibility for investment opportunities
  • Day to day dealings such as negotiating contracts or tenders

How is my business credit score calculated?

According to leading CRA Experian, nearly 90% of business owners don’t know what contributes to their credit score [4]. There are a number of factors that combine to work out your score, which, as mentioned, you’ll want to be as close to 100/100 as possible. 

The most influential factor of your score is how quickly you pay your bills back. This includes standard utility bills, rent, invoices, and obligations to creditors [5]. Late and missed payments can have a detrimental effect on your overall credit score as it will show lenders that you are unreliable. 

Yet, outstanding bills that are being paid on time can positively affect your score as it demonstrates that you can pay on time. Previous examples of high-value loans that have been paid on time, or before they were due, can work in your favour and make your business more attractive to lenders. 

Your previous business credit history will be under scrutiny, so the number of times you’ve applied for credit or a loan in the past will contribute to your score. This goes alongside your total business payment history, including times you’ve exceeded your business bank account’s overdraft limits or experienced incredibly limited cash flow

Your score will be also impacted by whether or not you file your business accounts on time. Using accountancy and bookkeeping software will make this task a lot easier, and help you earn easy credit points going forward. 

There are some other contributing factors that you perhaps have less of a direct control over. These include:

  • The length of time you’ve been in business, the longer the better.
  • Your business’ annual revenues, the higher the better.
  • Assets, such as property, the more the better.
  • Public records including liens and judgments against you from the past. 
  • Industry risk. Some industries including restaurants or wholesale suppliers may experience a lower score due to the industry risk level as a whole.

Understanding how your business credit report is determined will help you take the steps you need to improve it. 

How to build business credit 

If you’re a start-up company, the first step is to open a business bank account. This separates your personal credit from your business credit. In the initial stages of applying for a business loan, lenders will review your personal credit report as a basis to assess whether or not you could handle a significant business loan. Then, you can think about the type of account you’ll want to open to start establishing business credit for your company. 

Different types of business credit

There are four principal types of business credit lines [6]. 

1.Personal Guarantees

With a personal guarantee, if your business fails to pay back its debt as agreed, you will be held personally liable. You agree that you’re willing to surrender your personal assets, and your personal savings, if your business can’t repay the loan. Sole proprietors or small start-ups often require you to co-sign on a business loan if there is low, or no business credit.

2.Revolving Accounts

With revolving credit, your company will have a set credit limit, essentially like a business credit card. Once you repay the balance, you can continue spending up to your limit again, and the cycle repeats as long as you pay back what you spend. 

The terms of these types of credit cards usually mean that your company doesn’t have to pay back the full amount charged in a given month. Rather, only a minimum payment is due. However, only paying back the minimum set amount can accrue interest and can negatively affect your credit score, so it’s wise to pay off your full account balance each month, even if it’s not required.

3.Installment Accounts

Commercial installment accounts are loans that allow companies to borrow a fixed amount of money and repay a set amount, over an agreed period of time. These usually have fixed interest rates that don’t change over time, keeping repayments straightforward. 

4.Net-30 Accounts

This type of account lets your company pay for products and services after you’ve purchased them, like Klarna for personal loans. You buy now and pay later, usually within 30 days (hence, net-30).

Epos Now Capital - UK only

Epos Now Capital is a new financing solution that provides small businesses with between £2,500 and £300,000 in funding. This type of business loan does NOT impact your business credit score. This investment is designed to improve cash flow, provide a marketing investment, cover stock purchasing, expansion and renovation, and unexpected business interruptions. 

Repayment

A pre-agreed percentage of your daily card transactions will be diverted so that they are automatically paid to the lender. Every time you take a card payment, we will automatically be sent that percentage of each transaction - this is your repayment. There is no minimum you can pay on any given day, so you just pay less when you aren’t that busy. An approximate timeframe for repayment will be suggested; however, this simply mirrors your cash flow, so there is no set time period.

Epos Now Capital won’t impact your credit score. There are no hidden fees, fixed monthly repayments, and no early payment fees after 14 days.

Check if you're eligible for Epos Now Capital

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Epos Now’s point of sale (POS) software is designed with small business owners and managers in mind. Knowledge is power when it comes to your business’s financials, which is why our software provides detailed insights that pinpoint where your revenue is coming from and where your liabilities are. The profitability of your business is analysed and reports are produced showing your most profitable inventory/services, along with performance over time, sales trends, and labour reports. Streamline your financial operations and make better-informed business decisions with a dedicated POS system

Manage your stock with ease with Epos Now. Check your inventory in real-time, as it updates live, as products are being sold in-store, or through your e-commerce platform. Our software and systems are available though a monthly payment plan  and are extremely affordable, as we want to close the gap between retail giants and small startups. Learn more about POS, or request a callback from our experts today.

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