So, it has been a quiet month or quiet time of year. You make a business decision to apply for some cashflow assistance via the bank or other alternative business lenders. It is always good to understand the process from the other side to help you be better prepared and therefore save yourself some time and energy.
When applying for a business loan, you should first know your business credit score. For personal loan application, it’s pretty simple to get this a number of ways. There are many platforms in South Africa that allow you to access this information in a very simple way. For your business score, the methods are a bit different, but they still result in a number that will help you gauge your creditworthiness. For anyone looking to get a loan or get the best rate on a loan, knowing your score before you apply can be helpful and save you a lot of time (and money).
So, what does your score mean? How can you know if it’s a good or bad score?
Bad Scores Explained
While personal credit scores have some strict rules for what makes one good or bad, business credit scores are quite nuanced. You won’t find there to be the same hard line that designates scores at a specific number to be adequate for a loan. When it comes to business credit score, there are many variables that make up that number, and therefore not as simple as personal credit score.
Even the experts are reluctant to give a clear numeric value on what passes and what doesn’t. That doesn’t mean you have to go into an application blindly, however. We, at Fundrr believe that checking your own business score is very important before applying for a loan. Even though it is hard to understand the scoring model if you are not in the industry, we encourage business owners to pull the report and simply assess whether you are in the top 20% to 30% of the scoring spectrum.
Specific Scoring Models Matter
There’s another consideration that comes into play when dealing with business credit score: who is doing the scoring. Different agencies have different number and they each have their own definitions of what makes a person or business creditworthy. Therefore, whichever bureau you chose, determine their scale of good and bad and therefore try gauge where you fit in on that scale.
Options for Low Scores
Just as personal credit companies have some options for less favourable borrowers, business lenders do, too. With the rise of many alternative lenders on the market, there has been an increase of the acceptance rate of providing credit to small businesses. This is due to technological innovation, smart underwriting and the ability to access alternative data. If your score is too “low” for the banks to look at you, we strongly recommend trying to apply with some of the alternative business lenders out in the market. The rates will be higher than the banks, but if your business has enough margin to absorb it, then go ahead.
Another option is to look for secured lending opportunities. If your business owns some assets or wishes to acquire assets, you can secure the loan against the asset which will give you a better chance of being granted the loan if your score is “low”.
Traditional collateral can get you approved, as well. Securing your business loan with a home or the equipment you buy with the loan proceeds gives the bank (or other lenders on the market) a chance to get their money back, should you default. It can help bridge the gap between a hard “no” on your credit application and getting a modest loan at higher rates with a decent amount of collateral.
Raising Your Score is Preferred
While many options exist for small businesses with bad credit to get funds, the absolute best outcome for your company (especially in the long-term) is to raise your score and get approved for the most competitive lending offers. How can you bring up a sluggish business credit score? Start with these:
Ask vendors to report to credit
The companies you purchase goods and services from are not required to report your good payments to business credit agencies. They may, however, especially if you ask. If you have the choice to work between two similar vendors, choose the one that’s willing to help report your creditworthiness to the agencies.
Open at least one small business credit account.
If you’ve never opened an account in your business name, start now. It doesn’t have to have amazing terms, just be available. Use it, pay it off, and keep it open. Your score will reflect your good behaviour over time.
Keep your credit usage low.
Don’t use more than 20 – 30 percent of your available credit across all cards, and try not to have too much sitting on one card at a time. Bureaus do not show favourable outcomes to businesses that have high over utilization of revolving credit accounts.
Check your business credit report often.
Don’t take anything for granted. Always check to see that payments are being reported and that your history is building over time. Look for discrepancies that can drop your score and follow-up on any reporting errors you find promptly.
Never close accounts.
If you find that a credit card or open line of credit no longer works for you, just stop using it. Closing accounts will drop your score, so do what you can to keep it open. Some cards merely need a call from you once a year to let them know your intent to keep the line open; others require a charge once in a while. Do what you need to keep your credit accounts available, even if they aren’t your favourite. More open, paid-off accounts can help boost that score!
While having a low score is frustrating, many small businesses have no business credit score at all—which can be just as bad. If you haven’t done anything to establish a business credit footprint, don’t delay. Now’s the time to start creating the perfect score to access the best cards and loans available for your growing company.
If you wish to get some assistance in this space, please contact us and we will gladly assist.