Business Credit Risk FYI: How Is It Calculated And How To Manage It

What is Business Credit Risk?

Simply put, credit risk is the measurement of the ability of your business to meet debts and other financial obligations. It can be measured objectively using credit scores, or subjectively using credit ratings. 

How does it affect your business?

Let’s say you wish to take out a small business loan. If your business has a bad credit rating you may be subjected to unfavourable loan terms such as risk-based pricing or loan covenants, where you will have to report the financial status of the business at any given time. Managing a business loan can be stressful, but with higher business credit risk it can turn into a nightmare.

How can you lower your risk?

Most small businesses start with a standard credit rating based on the assets the business holds e.g. the equipment used in the business. Once the initial standard rating has been established, small businesses can be assessed based on the value of their current and future cashflows, and may even be assessed on the asset holdings of the company directors depending on the company structure.

Generally speaking, the best way to lower your credit risk is to avoid taking out unnecessary loans, and it is often considered best practice to only have one loan going at a time.

It is important as a small business owner to have a strong ability to pay back financial obligations. If your business needs to finance a project, small business loans are only one way to do this. There are other options available to small businesses, and considering the options available may save the small business from increasing its credit risk in the future.

The Solution:

FundX offers invoice financing as a genuine financing alternative to small business loans. FundX advances are repaid over 12 equal weekly installments. The rate is determined using our risk-based pricing approach, taking into account the performance of your business. FundX can help your business maintain a low credit risk by securing your small business financing through invoices rather than assets.

Of course, there are alternatives to small business loans and it is important to consider all the options available to you before making a decision on financing. FundX offers a great alternative to traditional small business loans, but there are other options available to you that you may consider.

Summary:

Business credit risk is calculated on the ability for a business to repay a loan. Having a high credit risk may have adverse effects on the ability for a small business to take out a loan. FundX offers a great alternative to small business loans.

Note: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.

Written by David Jackson, CEO and Founder of FundX.