In today’s fast-paced financial environment, a strong credit score can be the difference between success and stagnation for businesses. Credit scores serve as a key determinant for accessing capital, managing cash flow, and fostering business growth.
Why does it matter?
Kelvin Waitherero, the credit administration officer at Credit Bank explains that a credit score is a numerical representation of an individual’s or business’s creditworthiness based on their financial behaviour and credit history.
It is not just a number; it reflects the likelihood of timely repayment and the risk level lenders associated with a borrower. Both individuals and businesses need to maintain a good credit score to unlock financial opportunities. For businesses, a strong score means easier access to credit, better terms, and lower borrowing costs, all of which are critical for business expansion and strategic investments.
Credit scores are calculated using several factors, the most important being payment history and credit utilisation. “Payment history accounts for about 35 percent of the score, as it reflects the borrower’s ability to repay debts on time,” Mr Waitherero says.
This is followed closely by credit utilisation, which accounts for 30 percent and shows how much credit is being used compared to what is available. Other factors include the length of credit history, types of credit in use, and recent credit inquiries.
While personal and business credit scores serve similar purposes, they are calculated differently. “Personal credit scores are based on individual financial behaviours, while business credit scores consider factors such as trade, payment history, company size, and financial performance,” Mr Waitherero says.
These scores are reported by different agencies and vary depending on the credit bureau used. For businesses, additional elements like outstanding debts to suppliers and industry risk also come into play.
A business’s credit score is a reflection of its financial health and can significantly impact its ability to secure financing.
According to the credit expert, “Lenders and investors use credit scores to gauge the financial health of a company, ensuring that they are lending to a low-risk entity.” Businesses with higher credit scores enjoy lower interest rates, larger loan amounts, and more favourable payment terms. This access to affordable capital is vital for growth, managing cash flow, and seizing new opportunities.
Even the most well-intentioned businesses can fall into credit pitfalls. Mr Waitherero points out that missing payments, over-utilising credit, and failing to monitor credit reports are some of the most common mistakes.
“Businesses should aim to maintain strong cash flow, keep their credit utilisation below 30 percent, and regularly review their credit reports for accuracy,” he advises. Staying on top of these areas helps protect the business’s credit score from unnecessary dips.
For small businesses and sole proprietors, personal and business credit can often overlap. “A poor personal credit score can negatively impact the business’s ability to obtain credit,” he says.
To mitigate this risk, he recommends separating personal and business finances, registering the business as a separate legal entity, and building a distinct business credit history.
However, improving a business’s credit score requires diligent financial management. Paying bills on time, reducing credit utilisation, and diversifying credit accounts are essential steps.
“Businesses should also regularly monitor their credit reports for inaccuracies and correct them promptly,” he says. Additionally, establishing strong relationships with suppliers and paying invoices early can enhance trade credit ratings.
Mr Waitherero stresses the importance of regular credit score checks. “Both businesses and individuals should check their credit scores at least once a quarter to monitor for inaccuracies or potential fraud.”
There are several credit monitoring tools available that offer frequent updates and alerts, enabling businesses to address any issues before they negatively impact creditworthiness.
Consequently, credit bureaus play a critical role in generating credit scores by collecting and analyzing financial data. However, different bureaus may use slightly different scoring models, leading to variations in scores.
“Businesses must understand which bureau’s scores are being used by their lenders and how those scores are calculated,” Mr Waitherero advises. This knowledge helps businesses navigate the credit landscape more effectively.
The credit expert notes that certain industries and smaller businesses may face more challenges in maintaining good credit scores.
“High-risk industries, or businesses with volatile earnings, may find it harder to build or maintain good credit scores.” Larger businesses, on the other hand, typically benefit from larger cash flows and more extensive credit histories, making it easier to secure favourable borrowing terms.
A low credit score can have both immediate and long-term consequences for businesses. “In the short term, businesses may find it difficult to access credit or negotiate favourable terms with suppliers,” says Mr Waitherero. Long-term, a low credit score can hinder growth, damage the company’s reputation, and even result in strained relationships with partners or suppliers. For businesses aiming to scale operations, a consistently low credit score can be a significant roadblock.
Recovering from Credit Score Damage
Recovering from a damaged credit score requires a strategic approach. “Businesses should focus on paying down debts, improving payment habits, and lowering credit utilization ratios,” Mr Waitherero advises. Professional credit repair services can also help by negotiating with creditors, correcting errors on credit reports, and guiding businesses toward better financial management practices.
The link between credit scores and borrowing terms is clear. A higher credit score often leads to lower interest rates and larger loan amounts.
Mr Waitherero gives an example, “A business with a high credit score may qualify for a lower interest rate on a loan, saving substantial amounts over the life of the loan.” Conversely, a low credit score can result in higher interest rates and may even disqualify businesses from certain credit facilities.
Also, there are several misconceptions about credit scores that businesses should be aware of. Mr Waitherero highlights two common myths, “One is that checking your credit score frequently will lower it, which is not true for most inquiries.
Another is that closing unused credit accounts will improve your credit score, while in reality, this can negatively affect the score by reducing available credit and shortening your credit history.”
Maintaining accurate credit bureau information is essential for businesses as well.
“Businesses should regularly review their credit reports to ensure all listed information is accurate,” he says. If any discrepancies are found, they should be disputed immediately with supporting documentation. Ensuring the accuracy of credit reports is critical in maintaining a strong credit profile.
