In today’s post I’m going to cover everything you need to know about credit ratings in relation to small business loans.
If you’re thinking of applying for a business loan to support or grow your small business, your credit rating is very important. And not just the business’s credit rating, your personal credit rating, and any other beneficial owners (known as a consumer credit report).
A potential lender will look at several factors when they evaluate your loan application – and your credit-worthiness will be one of the key considerations.
It’s so crucial because it gives lenders an easy way to assess your reliability, whether you can actually afford a loan, and how big the risk is that you won’t keep up with your repayments.
Given how much impact your credit score can have, it’s important to make sure yours is in good shape before you apply for a loan.
First things first, what is a credit rating?
Your credit rating, or credit score, is an evaluation by a credit rating body (CRB) of how trustworthy you are as a borrower. If you have ever borrowed money, taken out a credit card or applied for a post-pay service (i.e. for a utilities or mobile phone account) you will have a personal credit rating.
Over time, your business will build up a credit rating too, which will be based on factors including:
- How long you have been in business
- Any credit applications the business has made and whether or not they have been successful
- Commercial credit information such as payment defaults or late payments
- Other publically-available information about your business (e.g. unpaid taxes, courtjudgments, lawsuits)
There are several different agencies that produce credit ratings in Australia, including Experian, Equifax (formerly Veda) and illion (formerly Dun and Bradstreet).
Your credit score will be stated as a number between 0 and 1000 or 1200. The higher the number, the better risk you, or your business, are considered to be.
Based on that score you’ll be ranked into a category, which indicates how likely you are to have an ‘adverse credit event’ (i.e. be late with or default on a payment) in the next 12 months:
|Agencies||Below Average||Average||Good||Very Good||Excellent|
|Experian||0 - 549||550 - 624||625 - 699||700 - 799||800 - 1000|
|Equifax||0 - 509||510 - 621||622 - 725||726 - 832||833 - 1200|
|Illion||0 - 299||300 - 499||500 - 699||700 - 799||800 - 1000|
Tip: The lower you or your business are down this scale, the less likely you are to be able to secure the finance you need.
That does not mean that all is lost – there are several lenders in the fintech market who specialise in ‘bad credit’ loans – but if you do find a willing lender you can definitely expect to pay more for your finance, to compensate for the increased risk to the lender.
Which credit rating will they check?
Before checking (and if necessary, cleaning up) your credit rating, you need to know which scores the lender will be looking at. That will depend on the type of loan you’re planning to apply for.
One way to inject finance into your small business is to apply for a personal loan, which you can use for any purpose. (This is risky, of course, because you’ll be personally liable for repaying the loan – and if your business runs into financial difficulty, you could risk losing everything you have). If you do opt for a personal loan then lenders will naturally be looking at your personal credit history when assessing your application.
Consumer credit report Example
- If you’re applying for a
business loan then the lender will check the business’s credit report, as well as the
credit report of the business owners.
Business credit report Example
Business owners will have a separate credit profile for their businesses.
Business Owner credit report Example
It can take time to build up a business and business owner credit rating, so if your business is just starting out then your personal credit report may be the deciding factor when it comes to your loan application.
You will need to take deliberate steps to build up your business and business owner credit profiles.
The following are things you can do to build up your profile:
- Create a legal entity for your business
- Use separate bank accounts for business use
- Establish trade credit accounts with some of your suppliers
- Request for a DUNS number
- Apply for a business credit card and pay it off in full each month
You may also be asked to provide a personal guarantee for some types of business loan, so your personal credit score will be important then too.
How to check your credit score?
It’s very easy to check your credit score in Australia. You are entitled to request a free copy once a year, or within 90 days of being refused credit.
You can also request additional copies at any time for a fee.
Request your reports from the following credit reporting agencies:
Credit Simple (illion score)
WisrCredit (Equifax and Experian score)
Creditsavvy (Experian score)
Getcreditscore (Equifax score)
What you’ll find on your credit report?
Your business credit report will include:
- The business's score and an assessment (i.e. which category the business falls into)
- Details of directors and shareholders
- Details of any defaults, rejected credit applications, court actions, writs or summons, judgments or bankruptcy filings against your name
- Information about any directors on your board who have been disqualified
Refer to a business credit report example below:
What to do if your credit rating is bad?
If your credit score is low, you may need to take steps to repair it before you apply for a loan.
Improving your score will help you access a lower interest rate, and may save you from a rejected loan application (which could further damage your credit rating).
Be wary of credit repair services that will claim to clean up your credit record for a fee – there is generally no value in these services, because they cannot remove any information that is correct (default listings etc) – and if there are any errors on your report, you can arrange to have them removed yourself, for free. Here’s how to go about it.
Fixing mistakes can give an instant boost to your credit score – but if your credit report is correct and your score is still low, your only option will be to improve your financial management and wait for your credit report to reflect your changed habits.
This means you’ll need to:
- Make sure you pay all your bills as they fall due
- Consolidate or repay loans where possible
- Reduce your credit card limits
- Pay off your credit card in full each month
- Avoid applying for any more credit until your record has improved
Even if you can access bad credit finance, if your business is struggling financially then taking out a loan could push you further into financial difficulty.
Instead, you may decide to engage a financial advisor to guide you as you get your financial management under control and boost your credit score – and to help you decide if, and when, is the right time to apply for business credit.
If you’re considering getting a business loan it’s a good to understand what a lender will look at.
They will of course look at factors such as how long you’ve been in business and revenue, but they will also be looking at the business’s and/or the business’s owners credit reports.
There are generally three types of credit reports…
Depending on the structure of your business, a lender will typically look at the first two reports.
I went through what the lender will typically be checking. And how you can go about checking your credit rating with each of the credit rating bureaus.
And most importantly, I covered off what you need to do if your credit rating is bad.
Let me know if you have any questions by leaving a comment below.