Building business credit is an important part of growing a company. Establishing a good business credit score can enable you to obtain financing easily, increase the value of your company, and protect your personal credit. Read on to find out what is business credit and why it is important to have a positive business credit rating.
What is business credit?
Just like your own personal credit score, your business also has a credit score. Business credit is a track record of a business’s financial responsibility. Many companies, investors, or financial organisations use business credit to determine whether or not that business is a good candidate to lend money to or do business with. When you establish a good business credit, it becomes easier for your business to borrow money when in need.
How is business credit calculated?
Many companies follow certain rules when calculating credit scores while some have their own proprietary credit scoring system. This means that different companies or institutions would assign different credits scores to your business based on how they compute it. Typically, the higher the credit score, the better your payment performance.
Here are some criteria that are used in developing a credit score:
- Public records, such as liens or bankruptcies
- Business profile information
- Credit history, such as outstanding balances and payment habits
- KYC / AML
- Litigation trace
- Business owner’s personal credit rating
There are two major credit bureaus in Singapore: Credit Bureau Singapore (CBS), and DP Credit Bureau, which was created to gather and store information on the borrowers’ credit payment history from banks and financial institutions that lend money.
CBS is Singapore’s most comprehensive credit rating agency, with complete uploads of consumer payment information from participating banks and financial institutions. With this information, CBS is able to put them together to create a credit profile to assess the credit worthiness of borrowers to potential lenders.
A CBS Credit Score is a four-digit number based on your past payment history on your loan accounts.
The score ranges from 1000 to 2000, where individuals scoring 1000 have the highest likelihood of defaulting on a payment, whereas those scoring 2000 have the lowest chance of reaching a delinquency status. Together with the score, the risk grade and risk grade description are provided. Apart from your credit score, there are other factors considered.
On the other hand, DP Credit Bureau (Experian Bank Bureau) is the country’s premier consumer credit bureau that captures consumer credit information provided by their members and assesses the default probabilities.
DP Credit Rating is a financial risk model that assesses the default probabilities of companies in Singapore. It is based on these 6 factors: Profitability, Capital Structure, Liquidity, Activity, Growth, and Size. Each score factor is from a scale of 1 to 10. The total score depicts the level of credit worthiness of the company, which is assigned a PD score which then in turn corresponds to an expected DP Credit Rating.
Why is business credit important?
A strong business credit can help you grow your company. Many financial institutions, investors, and companies rely on your business creditworthiness when setting loan terms, determining insurance premiums, increasing lines of credit, or considering you as a viable partner.
Here are some of the benefits of having a good business credit:
- Access to credit facilities at lower and preferential interest rates
- More favourable payment terms to suppliers
- Greater eligibility and access to loans and capital
- Increase the value of your company (If you ever hope to sell your business or attract investors in the future, a strong business credit profile can be a strong selling point.)
How can you improve your business credit score?
1. Always pay your bills on time
Timely payment of your bills and debts is a great way to improve your credit score. One of the main factors that determine your credit score are how much you use unsecured credit facilities and how promptly you pay them. You should set up an organised accounts payable system to keep track of when your bills are due.
2. Avoid applying for several loans within a short period of time
Every financial institution has its own set of requirements and checks before granting you a loan. Each time you apply for a loan, an enquiry is made against your report. Having too many enquiries in your credit report indicates to lenders that you are trying to take on more debt, therefore increasing your credit exposure. When you apply for several loans within a short period of time, it might indicate that you are a high default risk borrower, and will lower your credit score.
3. Apply for credit before you need it
Businesses who have shown a good track record and have been operating for at least 2 years are more likely to get a bigger loan size and better loan terms from financial institutions.
You should start building credit by applying for a small business loan or a business credit card. The point of getting a small business loan or a business credit card even if you do not need it is to show your business capability in making repayments on time, so that when you need a bigger business loan in the future, banks will be able to look at your credit repayment history and gauge your business creditworthiness.
4. Limit the number of credit cards and keep utilisation low
It is also important that you do not spend beyond the credit limit that you have been given. Try to keep your credit utilisation below 50%. If you exceed the credit limit, potential lenders see it as an indication that your business may be having a financial crisis and deem you as a riskier borrower.
Also, limit the number of credit cards you have and cancel the ones you do not need. Having a large unsecured credit limit increases your credit risk, even if you do not draw down on the limits.
5. Forge relationships with more than one lender
Last but not least, since different financial institutions have different lending criteria and risk preferences that may change over time, you should forge relationships with more than one lender. This will give you wider options when you are looking for business loans in the future. If you require a larger business loan amount in the future, you could potentially approach multiple lenders at the same time to raise the amount you require.