What does it cost a business not to have a commercial credit score?
What does it cost a business not to have a commercial credit score?
Commercial credit score is a crucial metric used by lenders and suppliers to assess a business's solvency and payment capability. A good commercial credit score can open doors to better financing terms and business conditions, while a low score can result in significantly higher costs. In this article, we will explain how much it costs a business not to have a good commercial credit score and provide practical examples of associated costs.
What is a commercial credit score?
A commercial credit score is a rating that reflects a business's ability to pay its debts on time. This score is based on several factors, including payment history, debt level, time in operation, industry type, and relationships with suppliers and lenders. A high score indicates that the business is reliable and financially stable, while a low score suggests the opposite.
Impact of a low commercial credit score
A low commercial credit score can negatively affect a business in several ways:
Higher interest rates: Lenders view businesses with low scores as risky, resulting in higher interest rates for loans and lines of credit.
Less favorable credit terms: Credit terms may be stricter, including shorter payment terms and smaller loan amounts.
Limited access to financing: Businesses with low scores may struggle to obtain financing, limiting their ability to grow and expand.
Higher supplier costs: Suppliers may offer less favorable terms, such as higher prices or shorter payment terms.
Reduced bargaining power: A good credit score provides an advantage in negotiations with lenders and suppliers, allowing for better terms.
Practical examples of cost of capital: To illustrate the impact of a commercial credit score on capital costs, consider two businesses: one with good commercial credit and another without.
Business A:
Good commercial credit Business A has a high commercial credit score. When applying for a $100,000 loan to expand its operation, it receives an annual interest rate of 5%.
Loan amount: $100,000
Interest rate: 5%
Loan term: 5 years
Calculation of total loan cost:
Monthly payment: $2,124.70
Total loan cost: $127,482.30
Interest paid: $27,482.30
Business B:
No commercial credit Business B either lacks a commercial credit score or has a low score. When applying for a $100,000 loan, it receives an annual interest rate of 20%.
Loan amount: $100,000
Interest rate: 20%
Loan term: 5 years
Calculation of total loan cost:
Monthly payment: $2,649.39
Total loan cost: $158,963.27
Interest paid: $58,963.27
Comparison
Interest paid by Business A: $27,482.30
Interest paid by Business B: $58,963.27
Difference in interest: $31,480.97
Business B pays $31,480.97 more in interest than Business A due to its low commercial credit score.
Conclusion:
Not having a good commercial credit score can significantly cost a business in terms of higher interest rates, less favorable credit terms, and limited access to financing. Maintaining a good commercial credit score is not only crucial for securing better financing terms but also for ensuring long-term growth and stability of the business.
Tips for improving commercial credit score:
Build it. This is the first major step.
Pay your bills on time: Payment history is one of the most important factors in your credit score.
Keep your debts low: Use no more than 30% of your available credit capacity.
Monitor your credit regularly: Review your credit report to detect and correct errors.
Establish strong relationships with suppliers and lenders: Good relationships can lead to better terms and conditions.
Diversify your credit sources: Having a variety of credit types can improve your score.
Maintaining a good commercial credit score is an investment in the financial future of your business.
At Capifinders, we are ready to listen to your needs and help you grow your business in the best possible way. Schedule a free call today.