What Leads to Poor Business Credit Scores?

Poor Business Credit Scores

When you need to take out a loan for your business, you’ll find that your business credit score will play a huge role. From determining the interest rate to how soon you’ll get the loan, a poor credit score can make the process very complicated.

Meanwhile, in Australia, a credit score below 500 is classified as poor or bad. And in such cases, you will need to apply for poor credit loans.

There are a few practices that can have a detrimental impact on your business credit scores. So to find out what they are, read this post till the end.

The Top 5 Reasons Why Your Business Credit Score Is Low

From delays in bill payment to having too many collection accounts, here are a few things that might be hurting your business credit score:

1.             Not Paying Bills Regularly

How regular your business is with the bill payments has a significant impact on your credit score. Meanwhile, running a business involves so many aspects, and there are multiple payments you need to stay on top of, like water, electricity, EMI, property bills, etc.

And if you find that your business often falls behind in bill payment, it could explain a low credit score.

2.             Pending Debt Settlements

If you have already taken many loans in the past for your business and are yet to pay them off, it will reflect rather poorly on your credit report, leading to a low credit score.  And this is often the case with many small businesses that take loans regularly to finance a piece of essential equipment or project and end up struggling to pay off the debts.

3.             High Credit Utilisation Ratio

If the trends are to be believed, credit utilisation ratios are given nearly 30% weightage during the loan approval process. So, what exactly is a credit utilisation ratio?

To put it simply, credit utilisation refers to the amount of credit you have used against the total amount that your business is entitled to. For instance, if your limit is capped at $15000 and you’ve used $2000, your credit utilisation ratio is 13.3 %.  And if this ratio is higher than 20%, your business credit score will start dropping.

4.             Credit Accounts and How Long You’ve Had Them

It is a common practice among businesses to have multiple credit accounts active simultaneously. And at times, when companies think of closing a credit account, they pick the oldest ones. However, this is a colossal mistake, as the longer, you’ve had a credit account, the higher it is valued during business credit score calculations. As such, if you only have new credit accounts to show, your credit score will inevitably take a hit.

5.             Credit Types

There are different types of credit out there, in the form of credit cards, loans, mortgages, and more. So, in accordance with the nature of your business activities, you may or may not need credit in all the different types. However, if you tend to put all your eggs in a single basket (prefer only one credit type), it can bring your credit score down a few notches.

Many reasons contribute to a low credit score, ranging from irregular or non-payment of bills, outstanding debt settlements, a high credit utilisation ratio, etc. And while a low business credit score makes getting a loan difficult, it is not impossible, as there are many poor credit loans that you can avail of. So, with the proper homework, you will be able to find a scheme that fits your needs.