Getting your head around the ins and outs of credit reports and associated terms such as credit rating and credit score can be challenging. Let’s break down everything you need to know about business credit reports and associated terms – credit score, credit rating and credit check.
|What is a Credit Report?||What is a Credit Score?||What is a Credit Rating?||What is a Credit Check|
|About||The whole information file concerning the potential debtor, including their credit history, credit score and rating from that reporting body.||A number representing the debtor’s creditworthiness (0-850 for RiskScore). Generated within the credit file to translate the data into more easily understandable terms.||A rating derived from the credit score (A1 to F for businesses credit checked using RiskScore). RiskScore credit ratings are accompanied by recommended actions for the creditor.||When a lender or provider is assessing the application of an individual or company, they will perform a credit check.|
|Use||Accessed by creditors, sometimes via a ‘hard inquiry’, to reveal creditworthiness information, including credit score and credit rating.||Simplifies the analysis process, allowing lenders and creditors to quickly determine the credit risk that an entity may pose.||Useful to translate credit score information into tangible actions – as the reporting body may make recommendations according to the credit rating assigned.||Performed by an entity to view a credit report, so it may assess an individual or company’s credit score and credit history.|
Credit report vs credit score
Credit reporting bureaus such as CreditorWatch have comprehensive credit reports on all registered Australian businesses. These reports contain details of a business’s credit score. Accessing and analysing these reports is an essential component of proper due diligence and ongoing customer monitoring for creditors.
A credit score is the number value assigned by a reporting bureau or rating agency based on the information in the credit file. Factors such as your business’s payment behaviour, maturity, entity type, industry and tax status directly impact your credit score.
Credit check vs credit score
The process of accessing consumer or company credit information is also known as a credit check. If an individual or business were to apply for a credit product, the provider would perform a hard credit check on their credit report to assess their creditworthiness, and discover their credit score as well as credit rating.
Hard credit checks can impact a credit score as they are noted in your credit report. If you were to apply for multiple credit products in a short period to ‘hedge your bets’, the lenders would see these hard credit checks in your credit report, and you may be perceived as ‘credit hungry’, and face rejection for your application. Multiple rejections for credit products can lower a credit score.
Credit score vs credit history
Another factor to consider is the difference between credit history vs credit score. Credit history refers to the information and events detailed in a credit report as this data will remain in the credit report for many years. A credit score lies within a credit report. Every credit report from each reporting body usually includes a credit score (unless not enough data is available on that entity).
Credit rating vs credit score
A credit rating is a grade assigned to an entity as determined by their credit report. By comparison, a credit score is a numerical value assigned to an entity. For example, CreditorWatch assigns companies a rating of A1-F as part of its RiskScore platform.
Credit scores for businesses
For Australian businesses, the sophisticated RiskScore technology from CreditorWatch generates a score between 0-850 to inform creditors of risk. It is the most predictive company credit scoring system available to the market. The higher the score, the less risky the business. This score refines the complex and extensive data into an easily-understood form, offering clarity and guidance for users.
CreditorWatch credit reports provides unrivalled access to extensive data and machine learning technology to credit check trading partners. Any Australian business’s credit file can be accessed via its ABN, ACN or company name, quickly identifying those at risk of default or insolvency. Incorporating over 11 million monthly tradelines of data from 55,000+ customers and Xero and MYOB accounting system integrations, the information included in our credit reports includes:
- Payment defaults
- ASIC notices
- Court actions
- Credit enquiries
- Adverse cross directorships.
Checking a company’s credit report before onboarding, or extending more lines of credit, should become an integral step of your due diligence process. Without doing so, you may be unable to reveal companies that pose a critical risk to essential cash flow until it’s too late. Trading partners may take steps to obscure or deny actions such as previously negative payment behaviour or ASIC notices, which RiskScore may bring to light.
Wondering if there is any relationship between credit score vs interest rates? As interest rates rise, lenders may place higher importance on borrowers’ credit scores. Higher interest rates result in higher repayments for the same principal amount, so a borrower must be more creditworthy to access debt in this environment.
Credit ratings for businesses
A company’s credit rating gets derived from its credit score. For example, once a business is allocated a score within RiskScore, it will be assigned a credit rating from A1 to F.
This rating places the business in a particular risk tier (with corresponding actions we recommend taking). A higher number would indicate a ‘good’ credit score, and a low number would indicate a ‘bad’ credit score for a business. For example, a RiskScore of 612 would give the reported business a B1 rating – indicating a ‘low’ risk to creditors. CreditorWatch recommends extending terms within consideration.
Less creditworthy companies or consumers may be subject to higher interest rates or a lower borrowing limit because of the heightened risk to the lender.
On the risk rating scale, any score resulting in a rating of B2 or higher indicates a ‘low’ or very ‘low risk’ to the creditor. However, an excellent credit score would be one that sits in the A1-A3 range:
|Credit Rating||Risk Category||Recommendation|
|A1, A2, A3||Very Low||Entity has a very strong aptitude to meet credit commitments. Extend terms within consideration.|
|B1, B2||Low||Entity has a strong aptitude to meet credit commitments. Unfavourable economic conditions may lead to a weakened capability to meet financial commitments. Extend terms within consideration|
|B3, C1||Neutral||Entity currently has the aptitude to meet credit commitments. Unfavourable business, financial, or economic conditions may impair ability to meet financial commitments. Extend terms and monitor ongoing payment behaviour.|
|C2||Acceptable||Entity has an adequate aptitude to meet credit commitments. Unfavourable business, financial, or economic conditions will likely impair the capacity or willingness to meet financial commitments. Extend terms, closely monitor ongoing payment behaviour.|
|C3||Borderline||Entity is vulnerable and the aptitude to meet credit commitments is dependent upon favourable business, financial, and economic conditions. Trade with caution, closely monitor and consider your payment terms.|
|D1, D2, D3||High||Entity is currently highly vulnerable. COD trading is highly recommended.|
|E||Impaired||Entity is currently highly vulnerable to non-payment and default. Trading eligibility must be considered.|
|F||Default||Entity has become insolvent or does not have the ability to trade.|
Avoiding risky debtors with CreditorWatch credit assessments
Each piece (credit reports, credit scores and credit ratings) forms part of the overall credit checking process. If you access a credit file – you’ll see the credit score and associated rating.
Accessing a company credit file with a simple ABN/ACN search using our market-leading RiskScore technology is essential to inform your trading decisions with real-time data and advanced analysis. It is the most comprehensive business credit checking system available to businesses, incorporating more than 50 public and private data sources including approximately 11 million monthly trade lines from Xero and MYOB integrations. The assigned credit score from 0-850 provides clarity, reducing the extensive data to a simple number and corresponding rating (A1 to F).
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