Everyone’s aware of personal credit scores and how they prove whether someone is ‘creditworthy’ or not to apply for personal loans. After all, there are hundreds of free sources where consumers can verify and track their consumer credit scores. Business credit scores, however, aren’t that popular. These scores do the same thing for businesses that personal credit scores do for consumers – they assess a business’s creditworthiness. But, personal credit scores and business credit scores are quite different in other ways –
- A personal credit score can be any number between 300-850 (FICO scores). Business credit scores typically range between 0-100.
- Businesses need to pay credit reporting agencies like TransUnion, Dun & Bradstreet, Experian, etc., to get their business credit reports and scores. Personal credit scores can be obtained for free from a large number of sources.
- Most importantly, most business owners, especially small-scale business owners, aren’t aware of their businesses’ credit scores. In 2016, 72% of small-scale business owners reported being unaware of their business credit scores. Five years later, there’s little progress. If their credit reports contain errors, their business loan applications won’t be approved.
Business credit scores are fundamental pieces of information in the world of commerce. Without them, banks wouldn’t know which businesses they should support. That’s why credit reporting agencies like TransUnion, Dun & Bradstreet, Experian, etc., spend a lot of resources assessing the payment histories, credit histories, debt usages, and other financial details of thousands of businesses. They use these assessments to come up with reliable business credit scores.
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Why Should Businesses Procure Credit Reports and Scores?
If you’re a small business owner wondering why you should get TransUnion business credit report of your own company and your partners’ companies, here’s a guide –
Make Smart Lending Decisions
Business credit scores clearly tell whether a company is in a position to repay its loans. The lower the business credit score, the less confident a lender should feel about doing business with the company. Small-scale business owners are at fault for making hasty credit and loan decisions.
Unlike large financial institutions, small businesses hardly conduct any research before advancing large amounts to merchants, suppliers, customers, and other businesses. Unfortunately, their good-hearted nature is taken advantage of by business owners with poor credit scores. Fueled by the economic pressures of the COVID19 crisis, such scam debtors are reportedly on the rise.
Bad lenders typically have very poor business credit scores. A simple summary of the company’s creditworthiness is enough to surmise that it’s best to avoid doing business with such business owners. If more businesses made loan and credit decisions based on the accurate findings of top credit reporting agencies, the number of yearly lender scams would drastically drop.
Set Clear and Specific Trade Terms with Lenders
Business credit reports not only help companies determine whether their partners or vendors are financially stable, but they also help them set clear and specific trade terms before entering into long-term contracts. Companies essentially get to avoid doing business with partners who frequently default on loan payments after reading these reports.
They also get to set highly specific trade agreements. For instance, if a business has more than ten delayed installment payments, you can lend them money at higher interest rates. Similarly, businesses can offer more favorable trade terms to lenders who have good credit scores.
Easier to Attract Investors and Customers
Unlike small business owners, angel investors or venture capitalists are extremely shrewd when it comes to giving different entities access to their capital. These financial wizards frequently use the services of credit reporting agencies like TransUnion, Dun & Bradstreet, etc., to determine whether a company they’re investing in has solid financial credentials.
If you’re a small-scale business owner who advances loans to business partners, vendors, customers, suppliers, etc., without checking their business credit scores, you’re not financially responsible. Smart investors can differentiate between financially responsible business owners and financially irresponsible business owners in an instant.
If an investor sees that your company has deep ties with organizations with poor financial histories, you’re highly unlikely to receive any funding. The ways in which businesses deal with other businesses, especially when it comes to lending money, represent their standing in the market. Smart business owners who always check business credit scores to make low-risk advances are viewed in a better light by potential investors and customers.
Establish Healthy Credit Practices
When a business uses its credit wisely, creditors realize that the company is fit enough to handle large loan amounts without overspending. Since it takes a long time for businesses to build their credit scores, companies with positive scores are typically very financially responsible and potentially great long-term business partners.
If businesses set clear rules about advancing money only to these businesses with great business credit scores, their market performances will also improve. Would you want to loan money to a business that constantly defers payments or a business that always repays its loan on time? Partnering with the latter type of business will help business owners operate in a stress-free manner.