When we talk about CTOS and CCRIS, we often think of an individual’s credit score, credit report, or credit rating. What is a credit score? What does it mean? Credit scores are numerical ratings by credit reporting agencies (CRAs) registered under the Credit Reporting Agencies Act 2010. A higher credit score suggests that the borrower is at lower risk and more likely to make on-time payments.
Besides individuals, CRAs have a mechanism that measures the credit rating of businesses and companies. These credit scores are used by financial institutions and financing platforms when deciding to provide a financing facility to the business. The higher the score for businesses, the more creditworthy they are for these institutions and platforms. So, the better the chances of them securing funding or financing from these institutions and platforms.
Before going further, it is important to know that different credit rating agencies incorporate different sources into their mechanics. Financial institutions under the purview of Bank Negara Malaysia (BNM) would often report payments to the CCRIS system. However, there are non-financial institutions that also provide payment behaviour data to credit rating agencies. These could include utility providers, suppliers, and non-banking lending institutions. Some credit rating agencies may take into account litigation proceedings by or against the company in question.
Establishing good credit scores is crucial because of the following reasons:
Suppliers will most likely look at your business credit score before offering terms
If your business cannot make payments on time – or at all, lenders are more reluctant to lend money or provide financing. They can see it in companies with bad credit histories. So if your company has a high credit score, you should have no trouble obtaining a loan.
Similarly, suppliers often provide a line of credit to their customers. This provides the customers with little leeway to make payments for the purchase of the stock or service. A business or company with poor payment history and bad credit rating may find it difficult to obtain favourable terms.
Financial institutions and financing firms rely heavily on business credit scores
For businesses that have established their creditworthiness, there is a greater chance for lenders to provide favourable loan terms. However, this might raise a question: how do I check my business credit score?
In Malaysia, Bank Negara Malaysia owns and operates the Central Credit Reference Information System (CCRIS). CCRIS processes data from participating financial institutions and turns it into credit reports.
Besides CCRIS, there are other private CRAs registered with the Ministry of Finance and under the purview of Bank Negara Malaysia. They are the Credit Bureau Malaysia Sdn Bhd, CTOS Data Systems Sdn Bhd, and Experian Information Services (Malaysia) Sdn Bhd. You can request your business report from any of these organizations.
Besides receiving your own report, other companies, businesses, or professionals may also request the report – provided they received authorization from you.
Using these reports, the financial institution or financing platform will be able to assess an applicant’s creditworthiness. You can find much information in the report, including bankruptcy, legal action, a person’s exposure to business, firm ownership, and directorships.
Bear in mind that while these reports assist the financial institution or financing platform in assessing your creditworthiness, often it is supplemented by internal proprietary matrices.
You need a solid personal credit history to qualify for a small business loan without a business credit score. An excellent credit score for small business loans does not necessarily mean your business credit score. If your personal credit score is good, you can still use it to apply for a loan for your business. This will support your application for business finance once you’ve built good business credit.
Challenges of dealing with business credit score
However, building a good business credit score doesn’t come without challenges. Here are some possible challenges you’ll most likely face when dealing with business credit scores:
It takes a while to establish or improve a credit score
Building an excellent business credit score cannot be done overnight. It is based on your company or business’ payment habits for the last 12 to 18 months. Once you get a financing facility or loan, you need to ensure that the payments are done promptly throughout these rolling 12 months. With that said, a poor payment remains visible in the record for that period. For instance, if you missed a month’s payment in January, that missed payment will continue to be reflected in your score until February the following year.
For small businesses, some financial institutions or financing platforms may examine the business owner’s personal credit rating to gauge their creditworthiness and financial discipline.
You can influence and improve, but you cannot directly change a business credit score
Rating agencies typically take note of indications that you are making an effort to build your business credit. This includes timely payment of bills, application for and use of business credit cards, and timely repayment of those cards. But remember that your credit score for small business loans will not directly affect your effort, as you are not making the report yourself.
Record keeping and monitoring can be time consuming
Keeping thorough records of your business credit history is a good idea. The credit history will follow you even if you own a few firms or close one, then create another. Not only that, your credit score records for small business loans may change over time. However, with many details to work on, this can be time-consuming for some people.
On top of that, you should not neglect thorough recordkeeping of your cash flow. Your books should reflect income and expenses as accurately and as timely as possible. Some financing platforms may look favourably upon small businesses that properly track their cash flow. It suggests a degree of fiscal and financial discipline.
Establishing good business credit is immensely important in building a solid business. Business credit scores can provide powerful insight into a business’s success to potential investors, creditors, and business partners. There are many different metrics to understanding and keeping track of your business credit scores, but at least now you have understood the basics. While business credit scores are not the “be-all or end-all” of creditworthiness, it gives a glimpse into the business’s financial and fiscal discipline. Again, it should be worth noting that when it comes to financing and funding, financiers, lenders, partners, and investors take into account other factors in tandem with your business’ credit score. Little by little these activities add to the overall, long-term success of your business.