SMEs and credit scores: How to be creditworthy

WITH Business Partners Limited’s quarterly SME Index regularly listing funding as one of the key challenges faced by small business owners, most entrepreneurs will, at some point, probably have to put in an application for small business funding or credit.

While you might be aware of the importance of maintaining a healthy relationship with your creditors, in your personal capacity, it’s important to know that a small business’s credit score can be just as much a make or break when it comes to maintaining its financial viability in the long run.

What is a commercial credit score?

When entrepreneurs apply for funding, financial institutions may reference the personal credit score of the SME owner for businesses in their first few years. However, as the business begins to gain traction and develop a history with its creditors, it will obtain a commercial credit score.

The score is determined by an algorithm that considers several data points related to the financial history of the business. The data is collected from many sources including debt collection services, debt review companies, public records from government institutions and banks.

The role a good credit score can play in growing a business

A commercial credit score ranges from zero to 100, with zero representing the highest risk and 100 representing the lowest risk. Typically, SMEs should aim to maintain a credit score in the upper quartile (75 and higher). Doing so will have important implications on whether a business owner is able to obtain funding.

The interest rate a business will be offered by creditors will also relate to their creditworthiness and credit history. It is, therefore, in every SME owner’s best interest to ensure that healthy debt management is a key component of their financial strategy.

An SME’s credit score can also play a key role in its relationships with suppliers. Small businesses who are deemed more creditworthy may be granted more favourable payment terms by suppliers and will find a greater ease of business than SMEs that are overly indebted or have not managed their debt efficiently.

How to maintain a healthy credit score

Entrepreneurs should view their business’s credit score in the same light as other important metrics and keep track of it, reviewing it at least three to four times a year. This can be done by requesting a report from a commercial credit bureau and storing the records, so that any fluctuations can be noted and corrected (or queried) if necessary.

The major institutions that govern the determination and recording of commercial credit scores are Experian, TransUnion, XDS and Compuscan. The bureaus have access to full reports on all small business, including any default payments or judgments.

Investing in an efficient accounts payment system is key to maintaining a healthy credit record. Fortunately, there are many fintech companies that offer free or cost-effective accounting software tools that can assist in keeping track of bills and ensuring that debts are paid on time.

Part of an effective debt management system involves cash flow forecasting which means determining whether your business may face any financial difficulty in the months to come and how to implement practical measures to mitigate the risks that may arise as a result.

Accurate forecasting will give SME owners enough time to contact creditors and make alternative repayment arrangements before financial trouble is compounded by a bad credit rating.