If you’ve ever had to finance a car, get a mortgage, apply for a credit card or take out any other form of personal loan, chances are you’ve learned the importance of a good credit score.
When it comes to owning a business, whether as a sole proprietor, partner or corporation, having a good credit score is just as important, if not more.
Credit scores play a crucial role in determining the financial health and viability of a company. Just as personal credit scores are essential for individuals, credit scores for businesses provide valuable insights into a company's creditworthiness and financial stability.
Today, we’ll explore the significance of credit scores for businesses and highlight why monitoring and improving these scores are vital for long-term success for Ontario businesses.
Understanding Credit Scores For Businesses
A business credit score is a numerical representation of a company's creditworthiness. In simple terms. It tells people how likely you are to pay your bills on time, signifying just how risky it is to lend you money. The higher your score, the less risky your business is.
Your company’s credit score is based on various factors such as payment history, outstanding debt, credit utilization, and public records. Third party collection claims, lawsuits and judgements also affect your credit score.
Credit reporting agencies compile and analyze this data to generate credit scores for businesses. The most widely used business credit scores are Dun & Bradstreet's Paydex, Experian's Intelliscore Plus, and Equifax's Business Credit Score.
Why Your Business Needs a Good Credit Score
There are many different reasons why you should have a good credit score.
1. Access to Capital
One of the main reasons why credit scores are crucial for businesses is their impact on accessing capital. When seeking funding from lenders, investors, or suppliers, a strong credit score can significantly increase the likelihood of obtaining favourable terms and securing loans.
Lenders use credit scores as an objective measure to assess a company's risk profile, determining the interest rates, loan amounts, and repayment terms they are willing to offer.
2. Establishing Credibility
Maintaining a good credit score builds credibility and trust with suppliers, vendors, and partners. A positive credit history demonstrates that a business consistently meets its financial obligations and is a reliable entity to engage in business transactions.
This credibility can result in improved business relationships, fostering growth opportunities.
3. Negotiating Power
A high credit score empowers businesses with better negotiating power. When dealing with suppliers and vendors, a strong credit score enables companies to negotiate more favorable terms, such as discounts, reduced pricing, or extended payment deadlines.
This can positively impact the company's cash flow and overall profitability.
4. Expansion and Growth
Credit scores play a vital role in a company's expansion and growth plans. Whether a business is looking to secure additional financing for expansion projects, lease new equipment, or establish trade lines with new suppliers, a solid credit score is crucial.
A higher credit score increases the chances of obtaining loans and favorable credit terms, allowing businesses to invest in growth opportunities and expand their operations.
5. Mitigating Risk
Credit scores act as early warning signs for potential financial risks. A sudden drop in a credit score may indicate underlying financial issues that require immediate attention.
By monitoring credit scores, businesses can identify red flags, such as missed payments, high credit utilization, or legal actions, allowing them to take corrective measures before these issues escalate.
How to Fix a Low Credit Score
Even if none of these apply to you today, making your company’s credit score a priority now, will set your business up for success in the future. If you suddenly need a loan and your credit score is low, it will be much harder to get it in a timely manner.
If you’ve never taken a look at your company’s credit score, you should do so right away. If your score is looking good, that’s great!
If not, you’ll want to work on improving it! Here’s some tips on how to do that:
- Pay bills on time. If you’re having a hard time meeting deadlines, work with vendors to set up a payment plan or terms that work for both of you.
- Report errors on your credit report. While it won’t necessarily fix the error, it will let creditors know what your take on the situation is.
- Pay attention to your credit score. Checking your credit score isn’t a one and done task. Be sure to review it regularly. Depending on your business, this may be quarterly, every six months or annually.
- If you have a good reputation with a vendor and they are not listed on your report, have them submit their data.
- Contribute to your credit profile by self-reporting.
By actively monitoring and improving credit scores, businesses can enhance their chances of success, mitigate risks, and seize new opportunities.
Interested in learning more about the importance of credit scores for your business? Reach out to the Koroll team of chartered professional accountants today.
