Business payment defaults and insolvencies soaring: How to maintain a healthy business credit score

James Beeson, leading finance expert and CEO of one of the country’s top business finance providers, Earlypay, is warning businesses to understand the impact of late payments on their business credit score and to put in place solutions to keep their score healthy.

“The concept of a business credit score is one that many business owners do not even think about when times are good and things are going well across the business,” Beeson said.

“However, when the economic environment starts to change and trading becomes more difficult, many things can affect the health of a business’ credit score and a poor credit score can impact the business in more ways than people realise.”

The latest data released by CreditorWatch shows that trade payment defaults have risen to their highest level since October 2020. Payment defaults are now up by 53 percent year on year. Court actions, another key indicator of business insolvency, are also up by 52 percent compared to last year.

Beeson has outlined tips on how and why to maintain a healthy business credit score.

What is a business credit score

“A business credit score is a view of the financial health and payment practices of a business. It compares the business on a numeric scale against the best and worst payers in the country. The higher the score or placement on the scale, the better the overall credit score,” Beeson said.

“Many financial organisations rely on business credit scores when considering lending to businesses. In addition, many businesses also check the business credit scores of other businesses before engaging with them as part of their due diligence processes.”

The importance of a healthy credit score

“A healthy business credit score generally demonstrates that a business is financial healthy, has good practices in place, is well managed and pays its bills on time,” Beeson said.

“As a result, suppliers are more likely to want to do business with an organisation that has a good credit score and they will provide better payment terms. Lenders are also more likely to provide finance and offer better terms.”

How are business credit scores calculated

“There are several credit score providers in the market that build profiles on businesses by sourcing information about them from financial institutions and government agencies as well as debt collection service providers,” Beeson said.

“In addition, many companies also have their own systems for the creation and management of credit scores for suppliers and other businesses they engage with.

“Credit scores can range and it is likely that businesses don’t even know they have a score. Businesses can also be reported to credit scoring companies for late payments which is why it is always important to keep suppliers on side and pay on time.”

How to improve the health of your business score

“When the economy is facing challenges, it is even more important to ensure you are maintaining a healthy credit score,” Beeson said.

“Businesses need to check their score regularly where possible to ensure they are working with up to date information. Pay bills on time and where necessary put in place payment plans and adhere to them.

“Improving cashflow is essential. Wind in late payers, unlock idle capital and utilise facilities such as Invoice Finance to get funds in the door quickly and consistently.”

Improve cashflow

“Businesses need to find ways to unlock funds and capital across the organisation,” Beeson added.

“Getting paid upfront for customer invoices and outsourcing debtor management through facilities such as Invoice Finance is a quick way to get funds in the business fast.

“Invoice Finance is one of the fastest growing finance products in the country because it provides upfront payments to businesses for the invoices they generate. Businesses can also hand over debtor management to the financial organisation which relieves the burden of chasing payments from customers and clients. The cost is also negligible.

“At Earlypay, this is one of our biggest areas of enquiry and fastest growing areas of business. There are no bank loans required or extensive trading history needed. In fact, it is available to businesses of virtually any size or age — even young businesses with a small trading history, or businesses with ATO debt or credit score issues.

“Business owners do not need to put up their home as collateral because the invoices are used as collateral. For businesses that use Xero or MYOB, we are able to integrate their accounts software with our user friendly platform enabling fast payment and easy follow up with their customers for payment.”

Beeson states that businesses need to act quickly to ensure they create and maintain a positive credit score. This will ensure they are able to access the best rates for financial products in the marketplace and also build highly productive, efficient and enduring relationships with other businesses and suppliers – even during the tough times.

About Earlypay

Earlypay is an ASX listed (ASX: EPY) provider of business finance that has experienced year on year growth since its inception in 2001. Earlypay provides a number of key services, including Invoice Financing, Trade Financing, Equipment Financing and Foreign Exchange Services.

www.earlypay.com.au