Managing Your Business Credit and Risk Score
It’s a scary truth that your business credit score will ultimately steer your success as your needs continue to grow. Just as with consumers, a credit reputation for business is hard to build and easy to destroy. It can take years to earn a good reputation and good credit score within your industry. But what exactly is a good business credit score? The defining factors differ than for that of consumers, and they’re extremely important to understand. Having a good grip on the concept will help you manage your business credit and risk score, in turn opening the door to new relationships and revenue opportunities. So, what is a good business credit score?
Building a Business Credit Score
Business credit scores are assigned by major commercial credit bureaus, based on an assortment of data as it pertains to that specific business. A good business credit score falls on the higher end of the credit bureau’s spectrum. So for example, Cortera’s scores range from 100-900 with 900 being the best possible score and 100 being the worst. This score predicts a company’s future health and credit risk by drawing insights from observing different trends. Much like consumer scoring, a higher score indicates a lower risk. Businesses may find that some bureaus calculate business credit scores solely from payment trends. The Cortera score is different because it also incorporates purchase trends, providing a more realistic assessment of that company’s financial health. Purchase trend information is exclusive to Cortera, combined with payment history and business events, thus creating the next generation of business credit scores which can be found on any of our reports.
So what’s the importance of this score? It is used as a measure of credit worthiness; having a good score will impact your ability to work with other businesses. Businesses with higher credit scores are able to negotiate better terms and higher credit limits, thus increasing the management of cash-flow.
Credit Score vs. Payment Rating
Since Cortera’s business credit scores incorporate so many variables, a separate payment rating is also granted to businesses which describes how a company has paid its suppliers over the past three months. Similar to the credit score, the payment rating also ranges from 100 – 900, with higher scores signaling a lower average DBT. Higher payment ratings are a positive while lower payment ratings would signal potential risk. This rating is used as a measurement of a company’s ability to make timely payments.
The longer you have been in business, the more accurate your payment rating will be. This is because the rating can be evaluated over a significant period of time or ‘history’. The more history, the more data, leading to the most precise rating.
Using Both Scores to Manage Risk
Managing both scores, while a break from traditional methods, is both forward thinking and a much more accurate way to address the important credit and risk decisions that you’re making. While purchases from key suppliers are essential, avoid purchasing excess “luxuries” or items that are not crucial to the everyday functionality of your business. This will help you make timely payments in full, without having to stretch terms or borrow from other areas of your budget. Once you start over-spending, you put yourself at risk of not being able to pay in a timely fashion, resulting in a lower business credit score and developing a questionable reputation among industry peers.
The key takeaway to all of this is that if you own a business, your business credit score is just as important as your personal score. Take the strategy you know and put it to work for you. The benefit of having a good business credit score will speak for itself.
To learn more about building your business credit score, fill out the form here.