What Affects Business Credit Scores?

A business credit score, presented as a three-digit number between 300 and 900, indicates an establishment’s creditworthiness.

Understanding ‘what are the factors that determine creditworthiness for business’ is essential for any organisation looking to secure funding or establish vendor trust. A strong company credit score not only improves loan eligibility but also enhances your credibility with vendors, investors, and partners. If you’re wondering how a business credit rank or score is determined, this blog will educate you on what affects a business credit score and shed light on its impact on an organisation’s overall financial health.

Understanding How Some Factors Affect the Credit Score of Businesses

The most prominent factors that influence business credit scores include a firm’s payment history, credit utilisation, length of credit history, the types of credit used, recent credit enquiries, and unfavourable public records. Let us take a detailed look at each of these considerations and the impact they have on a business credit rank.

Payment history

Payment history is one of the most important factors when calculating business credit ranks, Irregular payments can significantly reduce the company's credit scores, limiting future financing opportunities.

Not honouring the commitment to pay instalments on time by delaying or defaulting on the payments damages a business’s creditworthiness and can severely impact the business’s credit score. Companies must track and adhere to agreed-upon repayment due dates to ensure good credit scores.

Credit utilisation

A larger credit utilisation ratio may result from a borrower who repeatedly exhibits bad spending habits, such as spending beyond their means. Lenders view high credit utilisation as irresponsible and risky financial behaviour, which is why it can damage a business’s credit score. One of the most effective ways of ‘how to increase business credit score’ is by keeping your credit utilisation ratio low.

Length of credit history

Lending institutions view a long and positive credit history favourably, as it demonstrates that a business has a proven track record of making timely payments over an extended period. This can be a significant factor in improving a business’s credit rank. It indicates that a prospective borrower is capable of handling credit responsibly. This is why staying credit active and borrowing regularly can positively impact a business credit rank, but only as long as payments are consistently made on time. Building a long, positive repayment record is one of the most reliable ways to improve your business credit score over time.

Types of credit used

A diverse credit portfolio is something that lenders like to see, as timely repayment of various types of credit helps to build trust. This is why a healthy mix of secured and unsecured loans can help boost your business credit score.

Recent credit inquiries

Recent credit inquiries from prospective lenders can drive down a business’s credit score. These kinds of credit inquiries are called hard inquiries and occur when lenders access an organisation’s credit reports to verify their creditworthiness in response to an application for a loan or other credit product.

All hard inquiries show up on credit reports, and too many in a short span of time can damage the firm’s business credit score. It is important to note that when an organisation checks its own credit score, this is considered a soft inquiry that does not affect the business's credit score.

Unfavourable public records

Matters of public record can also impact business credit scores. These include publicly available information about a business, including matters pertaining to bankruptcy filings, legal judgments, liens, and collections. Issues such as these can damage business credit scores and stand in the way of securing loans in the future.

Depending on the nature of the issue, unfavourable public records can reflect on an organisation’s credit report for several years. Bankruptcies will appear on a business’s credit report for seven to ten years, paid tax liens remain on the report for seven years, while unpaid liens will stay on the report forever. Legal judgments will reflect on the credit report for seven years from the day of filing, although this can be longer if the judgment is renewed.

Among the many factors that affect credit score, payment delays and high credit utilisation carry the most weight in determining your financial trustworthiness.

How Can You Maintain a Healthy Business Credit Score?

Several factors influence a business credit score, including payment history, credit utilisation, credit history length, credit mix, recent inquiries, and public records. Timely payments, low credit utilisation, and regular monitoring are key. Managing these elements helps maintain a strong credit score and ensures long-term financial stability.

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