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A business credit score, also called a commercial credit score, is a number that indicates whether a company is a good candidate to receive a loan or become a business customer. Image Credit: Shutterstock

Dubai: The higher your credit score, the better are your chances of getting a bigger loan approved. This is advise you might have heard, particularly when it comes to looking after your financial health. But did you know entrepreneurs have a similar metric for their businesses?

What is a business credit score?
A business credit score, also called a commercial credit score, is a number that indicates whether a company is a good candidate to receive a loan or become a business customer. Credit scoring firms calculate business credit scores based on the business’ credit history, size and age, and legal cases.

“If a company wants to take a loan to purchase equipment, one factor the lender considers is the business’ credit score,” explained Dr Rashid Hammad, a UAE-based serial business investor and entrepreneurship mentor. “It’s a metric that is generally overlooked by newbie entrepreneurs.

“While the lender also looks at the business’ revenue, profits, assets and liabilities, and the collateral value of the equipment the company plans to purchase with the loan proceeds, the business’ credit score takes more prominence than the others.”

Why do you need to track your business’ credit score?

Here’s an illustration to understand its importance even better. Let’s say you are currently running a business (let’s call it ABC Ltd), and you are considering taking on another company as a client (let’s call it XYZ Ltd).

You would want to know the likelihood XYZ Ltd will pay its invoices in full and on time, as no one would do business with a client only to receive no payment. So by checking XYZ Ltd’s business credit score, you agree to do business only if the credit score shows a history of timely payments.

Hammad further noted that your business can even purchase a subscription service to monitor the partner company’s credit score on an ongoing basis. If the score drops significantly, you can reduce risk by discontinuing any business with the partner company or require payment in advance.

When else is a business’ credit score important?
Similar to the above illustration, assuming you run a new wholesale parts supplier, you again would want to check the business credit score of a parts manufacturer you need to tie up with to do business, before shipping out a truckload of parts with an invoice granting 30 days to pay.

In other words, if the parts maker has a high credit score, this arrangement would seem to have low risk, but if the parts maker has a low credit score, your business may want to ask for payment up front before any parts are shipped.
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Your credit score primarily comes from Al Etihad Credit Bureau, which is the regulatory body that determines your creditworthiness as well.

Your business’ credit score is different from ‘credit rating’

By definition, both ‘credit ratings’ and ‘credit scores’ show lenders and creditors a borrowing company’s likelihood of repaying a debt. “Both credit score and ratings are created by independent bodies like agencies or insurance brokers rather than by creditors or consumers,” added Hammad.

“If you seek to invest in a corporate bond, which is essentially purchasing debt issued by a company, you will first evaluate the ‘credit rating’ before purchasing the debt. ‘Credit rating’ also includes a detailed analysis of market prospects, business operations, management quality, industry performance, and the company's financial statements.”

Credit ratings are provided by credit rating agencies, mainly S&P, Moody's, and Fitch, whereas your credit score primarily comes from Al Etihad Credit Bureau, which is the regulatory body that determines your creditworthiness as well.

How does a ‘credit rating’ look different from ‘credit score’?
A credit rating is expressed as a letter grade, but a numerical credit score is a three-digit number that predicts the likelihood of an individual or a company to miss payments in the next 12 months.

How you can improve your business credit score or rating

Like Hammad, Zahid Majid, a Dubai-based serial entrepreneur, reiterated the importance of periodically tracking your business’ credit report from UAE credit bureaus, while tracking the levels of your credit.

“Besides records of financial statements, receipts, invoices, and tax returns, I keep a credit profile for each of my four businesses, and detect and fix any anomalies or inaccuracies. This way you monitor your firm’s financial health and show your creditworthiness to creditors and lenders,” Majid said.

“It is just as vital to control usage of credit as an entrepreneur. High levels of debt hurt your firm's creditworthiness. Aim for keeping below 30 per cent of your available credit limit. Paying off your debts improves your creditworthiness and frees up funds for prospective future investments.”

Five tips to stop your credit score or rating from tanking

Here are a few tips from Hammad and Majid on how to keep your credit score or rating from tanking:

1. Timely payments: “You can raise your firm's credit rating by consistently completing your payable accounts on time. Missed or late payments can hurt on your credit score, showing possible financial instability,” said Majid.

2. Legalising your business: Forming your firm as an individual legal entity, such as a corporation or a limited liability company (LLC), and separating personal and company finances is very important for establishing an independent credit history, Hammad further flagged.

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3. Diversify your credit portfolio: “Establishing strong ties with your lenders or creditors to diversify your credit sources, and utilising several credit types, such as trade credit, credit cards, and business loans, helps prove your competence in managing different types of credit,” Majid added.

4. Building healthy cash reserves: Majid also noted that building and maintaining cash reserves not only makes a case for your financial stability, but lenders are also more likely to offer credit to companies that can withstand unforeseen financial challenges.

5. Cut back on ‘personal guarantees’: “While ‘personal guarantees’ are a need when starting out as a business owner, look to limit them as your company grows. This prevents your personal credit from associating with the fiscal performance of your new entity,” added Hammad.

Bottom line? A better credit score gives you access to a broad range of options to build your business. This is because partner companies may be more inclined to offer more benefits to those with top credit scores since they are more likely to meet their financial responsibilities.