Industry Insights · 10min read

Company Credit Check: Why a Bad Credit Score?

Get to the root of bad business credit scores by learning what mistakes to avoid and why.

Regardless of where your company is integrated into the food supply chain, having a bad credit score is bad news for business. Below, we get to the root of things to help you understand why you may have received a bad credit score and help you consider what mistakes to avoid in the future.

 

What is a (bad) credit score? 

Credit scoring is a measure of creditworthiness that allows individuals, businesses and service providers to estimate the likelihood that a person or company will be able to pay back credit on time. It is standard practice for F&B business partners to inquire about each other’s credit scores to avoid debts and mitigate risk factors. 

If your business receives a bad credit score, suppliers, partners and customers are more likely to limit or outright reject prospects of doing business together. Difficulty raising capital, loan application rejections, limiting payment terms, exceedingly high interest rates, expensive insurance, difficulties obtaining utility contracts and trouble securing suppliers are just some of the challenges you might face as a result. This, in turn, can have dramatic effects on your ability to start, run and let alone grow your business as poor credit scores decrease trust and increase financial risks.

Creditors, such as lenders, merchants or service providers, will often rely on independent credit reference agencies (CRAs) to obtain your credit score in the EU. It should be noted that there are differences in credit scoring parameters and scales between CRAs as well as between countries and continents. Thus, a CRA in Germany might give your business an entirely different rating to a CRA in France, the UK or US. 

A comprehensive overview for individuals can be found here.

 

Why a bad credit score? 

To improve your credit score—or even better, avoid receiving a bad credit score in the first place—it is important to understand some of the drivers that can lead to this devaluation:

You are a new or small business

Building trust is a process. If you are just starting out, it is likely that you will have to face the reality that CRAs account for the number of years you have been in business, as well as factors like payment history or previous lines of credit. Furthermore, factors like revenue and assets—likely to be low for new businesses—are also considered. As your business matures and demonstrates trustworthiness, reliability, competitiveness and growth potential, these will reflect themselves in your credit score positively. 

Another point to bear in mind is that small businesses sometimes lack the resources for extensive in-house record keeping or monitoring, regardless of their age. Missing infrastructure can result in more human error or oversights that can impact business credit scores negatively.

Unpaid invoices/balances

If your business is regularly making late payments to suppliers or other partners, it is highly likely that this will raise some red flags. Lack of human resources, bad financial management, or struggles to maintain a positive cash flow are all possible culprits. It is important to bear in mind that cash flow can also be impacted by factors you cannot control, such as faulty machinery that requires unexpected repairs or a large client’s bankruptcy. 

The overall number of tradelines

In the business world, a so-called tradeline refers to all recorded activities where companies grant each other credit. Between B2B F&B suppliers (vendors) and food manufacturers (purchasing companies), for example, a tradeline materialises when a transaction is agreed upon. If your company has too many open tradelines, your credit score will suffer.

Unpaid credit card debt

If your company pushes the limits on your business credit card(s), you may find yourself in a bit of a pickle come credit checks. While there is no golden rule for a healthy ratio, there seems to be some consensus amongst creditors that keeping your usage below 20% to 30% of your maximum limits is good practice. Maxed out cards and unpaid debt are a definite no-go as your credit debt contributes directly to your overall lines of credit.

(Recently) closed credit accounts

This might come as a surprise to some, but closing accounts, particularly closing credit accounts, can actually negatively impact credit scores. The reason here is that when you have fewer (credit) cards, your utilisation rate—i.e. the percentage of credit available to you that you are actually using—will go up.

Public records

Previous court judgements, ownership details, personal credit (esp. for new businesses), and company liens can all negatively impact your credit score. 

Looking to improve your credit score? Read our article on seven tips for a better business credit score. Need help obtaining financing for the food industry? Contact our Sales Team (sales@foodcircle.com) and book a discovery call. 

Imagery: (1) Fabian Blank & (2) Rupixen Com via unsplash.com