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What Your Credit Score Has to Do With Your Business Financing Options

By J Ferrer

|

November 22, 2023

Not everybody understands what a credit score is, nor how important it is to know yours. But the credit score is not as mythical as it appears, and knowing what your personal and business credit scores are empowers you to negotiate better repayment terms and make more informed decisions about your business financing options. 

Want to learn how to check your credit score and, even more importantly, how to improve it? You’re reading the right article. 

What is a credit score? 

A credit score is the numerical representation of a person or an organisation’s creditworthiness expressed as a three-digit number. The higher the score, the lower the risk you represent to a potential lender. 

Credit scores are issued by credit bureaus and used by lenders — especially traditional lenders — to assess the creditworthiness of an individual or a business. Ideally, your credit score will show funders that you are willing and able to repay a loan on time and in full, which makes you or your organisation a favourable applicant for business financing.

Is there a difference between a personal and a business credit score? 

Yes, there is a difference between a personal and business credit score. Whereas your personal credit score is calculated according to your borrowing and payment history as well as any new accounts that you open in your capacity, your business credit score is calculated according to your business’s history of doing the same. 

One of the key differences between a personal and a business credit score is that many lenders will evaluate a business directors’ personal credit score as part of the application process for business financing. This is partially because many businesses, especially young businesses, do not have a robust credit history to offer creditors for evaluation. 

How is a credit score calculated? 

Generally, personal credit scores are calculated based on a variety of data points in a credit report. For an individual, this information includes the following details:  

  • Credit accounts such as credit cards, store credit, home loans, and vehicle financing 
  • Your payment history
  • Credit utilisation (the ratio of current credit balance to credit limits)
  • The length of your credit history
  • Any recent applications for credit 

On the other hand, a business credit score is calculated with the following factors in mind: 

  • Payment history 
  • Credit utilisation 
  • Amounts owed 
  • Company age
  • Related entities

Can I improve my credit score? 

Yes, it is absolutely possible (and encouraged) to improve your credit score. Not only will this allow you to access credit more easily in the future, but it will actually empower you to negotiate more favourable terms with your creditors. 

Here’s how to improve your score step by step: 

  1. Know what your credit score is 

It can be a little scary at first, but knowing what your score is is the first step towards improving it. You can check your credit score with tools like ClearScore

  1. Clear your record 

Perhaps you’ve checked your credit score and it’s lower than you were anticipating. Review your accounts and, if you find any lines of credit in arrears, pay them, or if necessary get in touch to set up a payment plan. Remember, most providers want you to be able to pay them, but it’s up to you to ask — and it’s much better for your credit score to have a repayment plan in place than to ignore your debts altogether. 

Your credit report may reveal late payments that you believe were made on time or similar errors. You can dispute these with the credit reporting agency that you’re working with. 

  1. Pay SARS

Unpaid taxes could drag your credit score down, and avoiding the tax man could end up causing damage to your financial profile. For example, a court judgment made against your name is public information that shows up on your credit profile for years. 

  1. Don’t take out too many credit applications at once 

Every time you apply for credit, you’re giving your lender permission to pull your credit report. These hard inquiries stay on your profile, and each query reduces your credit score by a single point. 

It can be tempting to apply to a long list of traditional and alternative lenders to increase your chances of securing business financing options for your SME. But, ironically, doing so can actually hurt your credit score. The wise choice is to apply only to the lender that best meets your growing business’s need for speed and simplicity

  1. Make payments consistently and on time 

The best thing you can do to improve and maintain a favourable credit score is to make your credit payments on time. Late payments are going to work against you so, if you anticipate that a payment is not going to be made on time, it’s best to take a proactive approach and let your creditor know in advance. An arrangement looks far better on your credit report than a default listing. 

A strong credit score = strong business financing options 

Credit scores give alternative lenders like Bridgement a good idea of an applicant’s attitude towards credit and their ability to repay, though we do consider a wide range of application factors in addition to one’s credit score. For optimal outcomes, make sure you’re in a financially healthy position before applying for business financing

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