You know your credit score is a reflection of your personal creditworthiness. If you manage to maintain a high score, you gain access to better rates and more personal finance products.
But did you know that your business can also have a credit score? We got in touch with specialists and credit bureaus to find out more about how this works.
Tip: Register with Justmoney and get your free credit report today.
What is a business credit score?
According to Darlene Menzies, CEO of FinFind, a business credit score is a measurement that is used to determine whether a business is managing its finances well, and to ascertain if it is a good borrower or not.
“The score is the result of a mathematical algorithm based on data gathered about the financial history of the business. It includes information about its regular payment behaviour and its repayment – or non-repayment – of debts,” says Menzies.
She explains that commercial credit scores range from 0 to 100, with 0 representing a high risk and 100 representing a low risk.
“If the business pays its bills on time, doesn’t incur legal action against it, and doesn’t have too much debt, it will have a good credit score,” she says.
According to Nedbank, the size of a business will determine how its credit score is calculated:
- For small and micro businesses, the business score is based on internally developed behavioural models (excesses, unpaid cheques or unpaid debit orders, arrears, etc.)
- For medium to large businesses, lending is based on financial statements on which, depending on life-time financial performance, the business will be assigned an internal credit rating
A measure for large businesses
There are so many small businesses in South Africa, it’s difficult to imagine all of them being assigned a credit score and having the credit bureaus track this along with each individual’s credit score.
Menzies explains that not all credit bureaus in South Africa collect business credit data. The six primary credit bureaus were established as consumer credit bureaus, meaning they were set up to collect and share data on individuals, not businesses.
“Where business credit data does exist, it is sparse, costed at a premium, and pertains primarily to larger, more established businesses (i.e. with turnovers of more than R10 million per annum) who have previously secured credit, as opposed to micro and small businesses (i.e. businesses with a turnover of R0 to R10 million per annum),” says Menzies.
She adds that while the credit bureaus will provide a business credit report, the majority are thin file. In other words, they do not contain sufficient information for a bank or lender to use in their credit scoring model.
“In South Africa, all of the lenders that provide business finance rely on the owner’s personal credit score to determine the creditworthiness of the business they own. They see the owner’s personal credit report as a proxy for the business. If the owner has a bad credit score, the lender assumes the same is the case for the business,” says Menzies.
As a business owner, it’s therefore important to ensure your credit score is up to standard so that your organisation can secure the funds it needs to kick itself off the ground or keep it afloat.
What influences a business’s credit score?
If your organisation is large enough to have its credit information collected, or it has a history with credit, there are certain factors that will be considered.
According to Prestige Credit, a South African business that provides insurance solutions to other businesses, the following criteria may be considered:
- Company details – Among other things, this includes the type of entity - for example, is your business a sole proprietor or listed company. It also looks at how long your business has been in operation, as there is a direct correlation between the period an entity has been in operation and its ability to pay its obligations. Around 30% of businesses fail in the first two years and up to 50% during the first 5 years.
- Principal details – Here the directors/members/trustees/partners or sole proprietors are considered. Is there any negative information on them as individuals managing the business as well as other business interests they may have and how are those businesses being run.
- Ownership – Details of the organisation’s shareholders and their percentage share. If applicable, holding company and subsidiary information is also considered.
- Operations – Details of a company’s activities, including markets, agencies and franchises, exports, imports, major suppliers, office locations, and staff complement.
- Trade references – Details of references obtained from an organisation’s suppliers. This includes a history of relationships, trading volume, and general experience.
- Financial Information – Financial information generally paints a fair picture of a business’s ability to operate effectively.
- Bank Code – Banks use an assessment code to confirm the current financial status of the subject’s bank account. This provides an indication of whether the account is good for an enquiry amount.
- Adverse Information – This is one of the higher-weighted categories as it looks at previous adverse information as a fairly good indicator of future behaviour. Has the business been blacklisted or have judgements been taken against the business?
If a collection of the above information paints a fair picture of a business, then it will likely receive a good business credit score. However, if there are clear areas where the organisation is lacking, it will likely lead to an average or low business credit score.
How to improve your business credit score
Having a good business credit score can mean a lot for an organisation. TransUnion, one of the larger credit bureaus in South Africa, explains that a business will benefit from taking care of this score in the following ways. It will:
- Grow or attract more customers while managing risks and costs
- Review credit limits for existing customers. This is important at times when you may need to identify sales opportunities or reduce credit limits for customers
- Identify customers whose ability to repay debts is getting worse
“We have been providing businesses with business credit scores for over 50 years. The information we use to get to an organisation’s credit score comes from different credible sources such as the Companies Intellectual Property Commission (CIPC); publicly available court records; banks; business credit providers; and our own research,” says TransUnion.
In order to improve your business credit score, you should ensure that your business and its directors or principals pay their bills on time and avoid paying late or not paying at all.
“A high number of missed or late payments could show a pattern of financial deterioration and could negatively impact your business credit score. Judgments listed against your business would then have a significant, negative impact on your business credit score,” says TransUnion.
Experian, another one of South Africa’s larger credit bureaus, notes that the following will count in a company’s favour:
- Having a lot of principals: The more principals a company has, the better. This because there are more options for collections when a company defaults or fails to honour an agreement, for which principals usually sign surety.
- Years of trade: The older the business the better, as industry trends state that 70% of companies fold within the first 5 years.
It is essential to review your business credit report regularly as any mistakes or irregularities can affect your commercial credit score and consequently lead to higher interest rates and difficulties in acquiring a loan.
To get a free credit report and find out what your personal credit score is, register with Justmoney.