Doing business with SME’s can be risky, but also very rewarding, so it is important to understand, if the risk associated with a particular investment is rewarded accordingly. Investors are therefore often spending immense efforts in order to assess the credit risks involved in investing in different SME projects, as well as when trying to maintain a balanced investment portfolio.
Luckily, risk assessment is made easier and a lot more transparent by the world’s most used provider of online business credit reports – the Creditsafe, which also currently boasts the largest business database in the world. Here at TFGcrowd we put our trust in the comprehensive credit reports prepared by them to assess the risks involved, when onboarding new borrowers onto the platform and when assigning credit limits.
Those of you, who have checked out the invoice financing options available on our crowdfunding platform will have noticed the credit score awarded to each borrower. This simple, yet global, measure allows comparing the risk/return trade-off between different borrowers easier and faster than ever.
In this blog, we would like to discuss the ins and outs of business credit scores and their importance in making investment decisions, as well as how TFGcrowd uses business credit scores to evaluate borrowers.
What is a Business Credit Score?
Simply put, business credit score is a measure of a company’s creditworthiness. It allows lenders, investors and other interested parties to assess the risk profile of a particular business, as well as compare it against other businesses.
Although credit rating companies use varying calculations to generate credit scores, most will assess the particular company’s outstanding liabilities, credit usage, payment history, legal filings, age as well as financial stability and often also the financial profile of the business owner.
The credit score of any business can be checked at any time by anyone wishing to do so and willing to pay for it to any of the credit rating companies providing the service.
Why a Business Credit Score Matters for the Business?
Business scores are used by lenders and investors to predict the odds of a business being able to cover their obligations or succeed in their business operations. Higher credit scores will make it easier to qualify for a loan or an investment and to command more favourable rates and terms.
Because of the reluctance of banks to finance small and start-up companies, often the SME owners think that business credit scores are only important for the big companies. For this reason, small and start-up business owners have frequently opted to use personal credit cards to fund their business operations instead of applying for business credit and building their credit history and scores.
As alternative forms of lending in the form of crowdlending platforms have emerged on the market, business credit scores have gained momentum for SME’s, as credit scores are used as a pre-requisite for onboarding, as well as by lenders and investors, when assessing the risk/return trade-offs. Owners of businesses of any size should therefore be aware of the rewards of building a business credit score.
Why a Business Credit Score Matters for the Lenders?
Lenders can use the credit score of a business as a snapshot into the financial situation of the business, as well as the likelihood of the business succeeding or failing to meet its obligations. A higher business credit score will provide confidence for the lenders in the creditworthiness of the business.
Universal credit scoring also allows lenders to compare different borrowers. Lower credit scores will allow lenders to demand higher yields in return for the increased risks they are undertaking, while higher credit scores will allow the more conservative and risk-averse lenders to feel at ease, while lending.
How does TFGcrowd Use Business Credit Score?
Here at TFGcrowd we know that there are various types of investors, with different appetites towards risks and returns. It is therefore important that each investor can choose with confidence the risk/return trade-off that best suits them. When onboarding a new borrower to our crowdfunding platform, we follow a careful due diligence process to assess each borrower and provide as much information about the borrower as possible to the prospective investors, so they are able to make informed lending decisions.
TFGcrowd uses a business credit score among various other applicable information to determine the financial stability of the potential borrower as well as to assign a credit limit to them.
As mentioned earlier, invoice financing campaigns include the credit score of the company raising finance in the funding details. This is published to ensure easier reference for the investors making lending decisions, as well as for comparison reasons, when calculating the risk/return trade-off.
We encourage investors to make full use of all the information available on the prospective borrower, the purpose of the loan and the business credit score, where applicable, to ensure that the chosen investment as much as possible matches the risk/return appetite.