An Australian business’s ability to gain approval for a loan depends upon various factors, such as the individual criteria of the lender, and its assessment of the borrower’s credit risk. Typically, lenders favour applicants with a credit score that represents a lower tier of risk. Some lenders may still offer loans to high-risk applicants, though these products often have higher associated interest rates and fees.
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What is a business credit score?
In simple terms – a business credit score is a number that represents its credit risk. If the score generated places it in a low tier of risk, the indication is that your business is more likely to pay invoices, bills and loans on time and in full. Conversely, those with a score that places their business in a high-risk tier are considered to have a higher probability of default or insolvency.
The credit score for your business is generated by credit reporting agencies such as our team at CreditorWatch, leveraging extensive data – including more than 11 million monthly trade lines from 55,000+ customers. Different reporting bodies have access to different data, and record information changes at different time points, so your credit score with one agency will not necessarily be reflective of your score with another.
What influences a business credit score?
The data that influences credit scoring will vary according to the individual credit reporting agency. However, it is commonly influenced by factors such as:
- Repayment history on credit products, utilities, credit card and invoices.
- Any outstanding liabilities.
- History of adverse events.
- Major events in the personal credit history of directors.
Different adverse events will remain on your credit file for different spans of time, according to how serious they are perceived to be. While each reporting body has its own standards for this, you may expect the following to be normal:
- Repayment history – Two years.
- Credit enquiries, payment defaults and court judgements – Five years.
- Overdue accounts listed as infringements – Seven years.
Now that more institutions, such as Westpac, have adopted Comprehensive Credit Reporting (CCR) standards, it is more likely that business credit scores will also be informed by more positive credit-risk data, such as successful repayments on loans and invoices. As more institutions pick up these reporting reforms, you may be able to boost your company credit score with positive behaviour.
Do business loans look at personal credit? They can, according to their own mix of applicant risk analysis and in-house due diligence. Some adverse events on your personal credit file (provided by a bureau such as Experian) may be considered serious enough to affect the creditworthiness of your business.
Why is business credit important?
Your business credit score is liable to be accessed by both loan providers and potential trading partners in order to gauge your creditworthiness. It forms an essential component of a sound risk analysis and due diligence process for these businesses. They need to ensure that they are protected against bad debt and risky entities to the greatest degree possible.
You may be wondering: do you need good credit for a business loan to be approved? Well, no, there’s no suggestion you can’t access loan products at all if you’re considered higher risk. However, it is generally assumed that you are more likely to encounter higher interest rates, stricter payment terms and a greater chance of the rejection of your application.
Each lender will apply different weighting to your credit score for a business loan and how it factors into their overall mix of risk analysis. Some lenders place a high premium on a business credit score, while others factor their in-house analysis in more substantially.
What is a good business credit score?
Utilising the sophisticated, machine-learning technology of RiskScore from CreditorWatch, a business can be allocated a credit score between 0-850. The higher the score, the lower risk that business is perceived to be – with scores over 600 appearing more favourable. That score is then combined with factors such as industry standards to place the enquired business into a credit risk tier. These tiers are specific to CreditorWatch and do not reflect the metrics of other reporting bodies.
|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, and 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.|
What credit score do you need for a business loan?
There is no single answer to which credit score is required to secure approval for different types of debt products. Instead, it’s worth thinking about in these terms: the better my credit score, the broader my options.
If a business generates a RiskScore that places it in the A1-A3 range of credit risk, then it should, in theory, have an easier time securing credit. The lower that score drops, the more difficult it may become. The minimum credit score for a business loan, according to our CreditorWatch recommendations, should place you no lower than the C3 band of credit risk.
The requisite credit score to secure approval will also depend on the type and size of the loan product being applied for. Different loan products have different bars to clear, as you might expect considering the variability of repayment periods and amounts loaned. Small business loans may require different benchmarks than a startup business loan or equipment financing agreement. Each lender establishes its own lending criteria and its own balance of risky debtors.
The following represent some of the loans or credit products that Australian businesses commonly apply for, and some of the generally understood credit history expectations:
Short-term loans from banks and lenders
Short-term loans (up to three years) are often smaller amounts than their longer-term counterparts, and therefore the approval process for these products may be quicker. The smaller the amount being applied for, usually the lower the creditworthiness bar that needs to be cleared. Applicants sitting within the C2 range or above can often secure approval for such products. If the loan is secured by the government, in the form of the Small Business Administration, then it can also be known as an SBA loan.
Long-term loans from banks and lenders
The repayment period for long-term loans can stretch up to 30 years, and the amount borrowed is often larger than those applied for in short-term loans. As such, many lenders will place a higher premium on a good credit score and history, in order to better guarantee the security of the loaned funds over a longer period of time. Ideally, the business applying would want a score that places them in the B2 range or higher when considering these products.
Lines of credit from partner businesses
Each individual business makes their own judgements when extending lines of credit, some of which aren’t based on any perceivable logic at all. However, if they are proactive in their risk management, then they will leverage the credit reporting tools from CreditorWatch to inform their credit line decisions with real data and analysis. The recommendation broadly is that you can extend terms to any business with a score of C2 or higher. This will vary though based upon the financial situation of both parties, stage of growth, and size of credit being asked for.
Credit for equipment financing
Typically such products are similar to either long or short-term loan arrangements according to the value of the equipment being financed and the repayment period. The smaller the value of the equipment, the more likely a high-risk debtor can secure financing, generally speaking.
The difference can be the security of other company assets being used as ‘collateral’ to underwrite the loan, which can improve the likelihood of being approved for credit. If the company has plentiful assets to underwrite the financing of new capital, then its credit score may not be so relevant. Still, it is recommended to be sitting at the very least within the C3 tier, in order to allay some of the lender’s concerns.
Access all of your business credit reporting needs with CreditorWatch
With our CreditorWatch suite of RiskScore, debtor management, 24/7 monitoring and alerts, and credit reporting tools at your fingertips, gone will be the days of your business leaving credit risk analysis to chance. Clearly identify those that are safe to trade with, safe to extend lines of credit to, and unlikely to default or fall into insolvency. Any Australian business can be searched according to its ABN, arming you with the essential creditworthiness detail to make informed decisions.
Speak to our expert team today to secure your cash flow.
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