How Your Small Business’ Credit Score Works

If you’ve ever had to apply for a loan or credit card for your business, you’ll know that it is both daunting, and a bit mystifying. Sat behind a computer screen, your bank manager seems to wield all the power to decide whether you deserve that extra working capital to grow your business – or not. The answer can often feel arbitrary. Who decides whether you’re trustworthy enough to borrow someone else’s money, and pay it back? How did they come to that conclusion? And, most importantly, what can you do about it?

The answers are burrowed in a wealth of information that banks and trade lenders know about you, your business and your business dealings. Lenders today examine far more than just your previous credit history to examine your traits as a consumer and business owner, using data which is not included on a traditional credit score.

Building a picture of your credit history

At LexisNexis Risk Solutions, we use over 10,000 sources of data to compile a comprehensive profile of a small business and its owners, and use algorithms to assess its creditworthiness. For those of who haven’t been approved for a loan before, and have what is called a “thin file” or “no file” credit history, this can be good news. A bank might be able to lend those prospects money, based on other traits that indicate you will be a responsible credit consumer.

Currently, only about half of small businesses have a credit history, and of those, about half are thin file consumers. It can take between three to five years for a small business to build its “credit footprint,” so for companies in the early stages of growth, this can be challenging. Often, a company with a thin file or no file credit history will need a personal guarantor to qualify for a business loan. Choose wisely, because if that person has a derogatory experience in their credit history, it can count against your business when it comes to applying for a loan.

Your best business behavior

Let’s say your business has been up and running for a while, and you decide to apply for a business credit card for expenses. Prior to this point, you may have rented office space or opened a shop, set up a phone system to receive calls from customers, turned on the lights and the internet, paid your suppliers, acquired a business license and registered with the Secretary of State. All these actions can be analyzed by a lender to assess your ability to repay a loan.

For instance, if a small business has registered with the Secretary of State, then it poses about half the risk of defaulting on its loan, compared to a business that is unregistered. On the other hand, if a small business already has a derogatory experience in is credit history – such as a bankruptcy, a tax lien, a judgment or a foreclosure – then it is three times the credit risk of a business which has a clean slate. This goes up to four times the risk when that derogatory experience is in the past twelve months.

Opening up credit to responsible small businesses

Gaining access to credit is important for the growth and sustainability of many small businesses. Whether you’re waiting for a client to pay, want to keep track of your expenses, or grow a flourishing business, access to credit enables your business to survive and succeed. For small businesses without an existing credit history, alternative data enables lenders to evaluate the likelihood that you’ll repay your loans on time, thereby opening up access to this valuable source of finance. As more and more lenders adopt these methods of assessing credit applicants, this takes the mystery out of credit scores, and makes the business world a fairer, more inclusive place.


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