Much like your personal finances, your business’ financial history/circumstances is assigned a credit score. Of course, a credit score is not just a number – it can be a huge factor in the success or failure of your business.
Here we explain the key points you need to understand about your business’ credit score and, importantly, how you can improve it.
What is a business credit score?
Credit reference agencies (CRAs) collect and record information about your business’ past and present financial behaviour. Typically, this includes:
- Payment performance information (have you paid invoices on time, have you repaid finance on time)
- Your total amount of debt (also known as credit utilisation ratio)
- When you held credit and for how long
- The type of finance you have
- Any applications for finance you’ve made recently
- Companies House information (length of trading, whether you meet filing deadlines, trends in financial accounts)
- Public information (e.g., county court judgements)
Taking their information from a wide range of sources, CRAs then calculate a score which represents your financial situation and whether your business is high or low risk financially. The score assigned will vary depending on each CRA’s scoring system, e.g., some range from 0 to 100 while others might range from 1 to 1000.
Why is a credit score important?
This credit score helps lenders, suppliers and other creditors to quickly evaluate whether your business is financially stable, and whether you will pay your bills and honour your financial agreements.
So, when you apply to a lender for a loan or finance arrangement such as asset finance or hire purchase, the lender will access your credit score to gain an understanding of your financial situation and historical behaviour. They may also look at your personal credit score.
The better your credit score, the likelier it is that not only will your applications for loans or finance will be successful but also that you will be able to access more favourable interest rates. A low credit score will often mean finance is only available at a higher interest rate, or, in extreme cases, you may be prevented from borrowing funds completely.
However, having issues on your credit report will not necessarily stop you from accessing finance, and there are steps that you can take to improve your credit score.
How to improve your business credit score
It is important to realise that credit scores are complex statistical models for predicting credit risk and there is no guaranteed way to improve your business credit score. However, there are some steps you can take that may move your score in the right direction.
Check your credit report
If you have not already done so, it is time to access your credit report. There may be a cost involved, but the information in the report could be crucial to your success. When you know your score you will have a deeper understanding of your score and what needs to be done to improve it.
Dispute and request deletion of any errors
Sometimes there may be errors on a credit report which could be dragging your score down unfairly. If you see something on your report that you believe is incorrect, you can dispute it with the credit agency and possibly have it removed.
Pay your bills on time
One of the easiest ways to improve your business credit score is to pay your bills on time. Missing repayments or late payments will have a significant impact on your score.
Decrease your credit utilisation ratio
A factor that can make you appear to be a high credit risk is having a high credit utilisation ratio, i.e., borrowing close to the maximum limits of the credit available to you. To decrease your credit utilisation ratio you could clear balances where possible, increase your credit limits with credit card providers, decrease your credit card spending, opening a new line of credit and/or paying your bills more than once a month.
Establish credit accounts with suppliers
If there are some suppliers that you work with regularly, consider opening a credit account with them and stay up to date with all your payments to add a positive financial agreement to your report. If you have a good working relationship with a supplier, ask them to provide feedback and share payment record data with credit reference agencies.
NOTE: It might make sense to keep track of the business credit score of your partners, important suppliers and customers, as them falling into financial difficulty could affect your score too.
Keep your company information up to date
Limited companies should be filing full accounts and annual returns with Companies House on time. If any of your information (such as your registered office address) changes, notify Companies House, as well as your suppliers and customers, as soon as you can.
Maintain a healthy cash flow
Ideally you will be able to maintain a healthy cash flow with regular turnover, as long periods of time without any activity on your account could be a warning sign. Your credit score should improve if you can show a growing balance sheet and regular turnover.
Don’t make lots of credit applications in a short period of time
It is not wise to apply for credit unless it makes financial sense for your business, so avoid making unnecessary applications as they will show on your report. It is particularly important to avoid making a lot of applications in a short period of time as each will trigger a search on your report making it look like you are in financial trouble or borrowing irresponsibly.
Avoid living in your overdraft
Using your business overdraft from time to time should not be an issue, but being over-reliant on it can be a red flag for lenders. Keep a close eye on when payments will be taken from your account and try to ensure that there is enough cash in your account to cover payments that are due.
Make sure your registered office is correct
County court judgements (CCJs) on your report will have a big impact on your score. A common reason for getting CCJs is that letters requesting payments or making business owners aware of issues are sent to the registered office but they are not received as the address is incorrect.
Don’t ignore your personal credit score
Where possible it is important to ensure that your personal finances are healthy, especially if you’re a start-up with little financial information available as lenders may use data from your personal accounts to calculate your business credit score.
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