Do you know what your business’ credit score is? According to research from MYOB and OnDeck, 93% of Australian businesses are in the dark about their credit score. If you haven’t wondered, it’s high time you knew. [https://www.finder.com.au/business-credit-score]
To the outside world, your credit score is an indicator of trust and faith in your business’ finances. Your credit score is a number ranging from 1-850 – with 850 being “flawless” credit. The average credit score of Australian businesses is about 700, according to CreditorWatch.
Other businesses may refuse to trade with a business with a low credit score, fearing risk of not being paid back. To ensure your business credit score is as healthy as it can be, here are five tips to keep it as high as possible.
#1 Pay your bills on time and in full
This may seem obvious but paying your bills and outstanding invoices on time and in full is vital for your credit score. A consistent record of good financial conduct helps maintain a good credit rating. When businesses do not pay (usually after 60 days overdue), a default is placed against them. Defaults are a black mark on a credit report that indicates to others that it is delinquent on its bills and stay on reports for up to five years. This can hinder gaining credit from lenders and lead other businesses to not trust in trading with them.
#2 Keep debt manageable
If your business has many debts, it makes sense to try and pay down debt as much as possible before looking for new credit. You should not apply for credit if you know you have bad credit, as it can worsen your score. However, a consolidation loan may be a good choice to save on interest. A cashflow finance option can also help alleviate cash flow problems while giving your business the opportunity to pay off high-interest loans in one hit.
#3 Monitor your own credit score and defaults
A business can monitor its own credit score by taking advantage of free credit reports from a credit reporting agency. This service is usually free for one report per year. The credit report will show you your score and any defaults registered against you. If you have defaults, you can identify them and try to fix them. Other services such as OnDeck or CreditorWatch can monitor your (and other’s) score in real-time, giving you alerts to defaults and other fluctuations such as court rulings and ASIC status changes. This often has a monthly fee but can give you and your creditors better peace of mind.
#4 Diversify your credit
The ultimate sin in business is using long-term credit to pay for short-term assets and vice versa. A line of credit to fund immediate purchases may help your credit score long-term. “It makes sense to go through your balance sheets, identify what problems new types of credit will solve, and then shop around for a good deal with a business-oriented broker,” says Savvy CEO Bill Tsouvalas. “It could get you out of the red and back into the black with an improved credit score.
#5 Invest in automation
Invoicing, paying accounts, and receiving alerts on your credit score can all be automated using cloud accounting software such as Xero or MYOB. As discussed, OnDeck and CreditorWatch have automatic systems alerting you to changes in your own credit score or that of suppliers/clients. This means you can get on top of any business changes without it being a complete surprise.
About the Author
Bill Tsouvalas is the founder and CEO of Savvy, one of Australia’s leading financial institution. Established in 2010, Bill turned Savvy into one of BRW’s fastest growing companies in 2015. He frequently shares his knowledge and ideas on business finance, money and investment in the media.