Every day computers are out there deciding who does and who doesn’t get a business credit loan through a process called credit scoring. Lenders rely on these complicated algorithms to score hundreds and thousands of small business credit actions. Some business owners resent these systems and think they are unfair. All companies need to understand how this system works.
Credit scoring makes the credit selection process automatic. It speeds up the processing system, helps keep down costs, helps make adjustments to interest rates quicker, and makes the process more objective because it is untouched by human hands.
Credit scoring helps predict whether borrowers will be a good credit risk, using up to about 20 factors to evaluate credit worthiness. A lot of creditors use it to score transactions under $100,000. More than 90% of the major credit providers use if on transactions below $ 50,000.
One of the main credit scoring companies is Fair Isaac and Company. It researched statistical credit scoring in the 1980s. They found out that if a person’s individual credit habits were good, more than likely so was their corporate credit habits. Their model gives scores of between 50 and 350. If a business gets 220 or above, it is considered a low risk, but it falls below 175, it is a bad risk. But the key factor in corporate credit scoring is business owner’s or his principals’ credit history. Small transactions are scored using other factors related to the credit histories.
Business-oriented credit factors scored comprise the company’s time operating, size, trade, company organization, debt history, business net worth, how much in the bank, debt to income ratio, cash flow, and if they have had judgments or bankruptcies against them. Some larger lenders have their own scoring methods, but they are usually based on a fine-tuned version of the Fair Isaac model, organized to better meet their needs and preferences. If your company is rejected for corporate credit account due to its score, ask the creditor to list the reasons. You might get a second chance to get the loan.
A few creditors make special pools for clients with higher credit risk. These have a higher interest rate and less favorable terms than if the business is low risk. Others might ask for credit something like additional collateral or outside guarantees.
You can always work to improve your corporate credit score. Some ways to do it include getting better credit habits, paying back taxes, settling any liens or judgments, pay all bills on time, get rid of supplier disputes, sell accounts receivable to help cash flow, set up your company’s credit record with the Secretary of State in you area, buy from sales people who report your payments to the credit bureaus, pay your bills through auto transactions and try to keep these good habits for at least a year.
While credit scoring isn’t perfect, it does help lenders make up their minds. The disadvantage is that some borrowers don’t fit the mold created by the computer programs that run the system, so they are left out of the running. If this happens to you, don’t fret. There are still lenders out there that actually like talking to their customers. They will possibly see you in a better light and give you the loan you need. So, let’s build business credit now!