What Your Business Credit Score Means and How to Improve It

Last Updated: Mar 18, 2021
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We are all aware of how important having a good personal credit score is for securing finances for mortgages and low interest rate credit cards, but just how aware are business owners about their business credit score? Do you know how good your score is or even how to go about improving it and managing it effectively?

What is a credit score anyway?

To be honest there are a many people who don’t actually know what their credit score means or the importance of having a good rating. Being oblivious to credit scores is quite common for small business owners in the UK apparently. According to a 2014 survey conducted for Experian, the small business directors interviewed were frequently unaware of how their credit rating was influenced, or how to go about improving it.

In actual fact only 13% of the SME directors taking part in the survey could correctly identify the main key factors that would influence their business credit rating. It was also discovered that 59% of the companies had never bothered to check their credit score. Of those who had checked their rating,  just over half of them had not checked their score in over six months.

The importance of business credit checking

Credit checking your business should be an essential task to be performed regularly during your routine cash flow and credit control practices. It should become as normal and regular as when you are performing credit checks on your customers or business clients. Remember that if you are performing credit checks on your own customers, the chances are that they will also be credit-checking you too! Having a poor commercial credit rating is not going to reflect well on your company image or credibility.

Why is a good credit score important?

Business owners will usually plan for growth and expansion over time and doing so may require the company to secure outside funding from bank loans or other financial sources. It is normal banking procedure to check your business credit score when you apply for financing or business credit cards. Your credit score will heavily influence the decision by the bank to approve your application or not, so you will want to ensure that your score is good before you even approach any financial institution for a business loan or to set up credit facilities.

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How your credit score is worked out

Your business credit score is based on a number that is created by a Credit Reference Agency (CRA). Your score will depend on your financial history, so the CRA will look at your track record for paying back previous loans and borrowings, and how often you were late with payments, if at all. Obviously having a good credit repayment history with no late payments is going to result in a more favourable credit rating.

What lenders look for

When you decide to approach a financial lender for funding, such as a high street bank, the lender will look at your business credit score before deciding whether or not to finance you. Depending on your credit rating, they will set appropriate borrowing limits, interest rates and repayment terms. The terms they set out will go towards mitigating any risks they see with you, so if you have a good rating and have always maintained a good credit score, you are more likely to be accepted for credit and loan applications. Keeping a good credit record can also make it less expensive for you to take out credit when you need it.

Maintaining a good long-term credit rating can also benefit your business in other ways. For example, should you ever find yourself competing for a lucrative business contract, having a good credit score will make your company appear more favourable and trustworthy that your competitor, especially if their score is questionable.

How to improve your business credit score

There simply is no ‘quick fix’ method of improving your credit score overnight, despite the promises made by some dodgy adverts popping up in your news feed. However, it is comforting to know that building your credit score only needs you to be diligent about three main things: robust information, sound financial management and regular monitoring.

All of this takes time of course, but it is not difficult to do. If you can pull together some basic tasks and make them part of your routine, you will soon start to see your credit score begin to rise. It is just a matter of being diligent and maintaining your efforts to keep your score high in anticipation of the times when you will be seeking outside funding.

Here are out top tips to help you start to build up a credible business credit rating:

  • Avoid County Court Judgements (CCJs) wherever possible and pay them on time should they occur.

  • Be aware of your score. Sign up for instant alerts that notify you when your company’s credit record changes or is searched. Address problems as they occur rather than leaving them hanging.

  • Check and monitor your customers’ and suppliers’ credit positions to ensure your credit record will not be damaged by their actions.

  • Check your credit rating score each month to be aware of any surprise changes that could affect your status.

  • Collaborate with your business partners and suppliers. Ask them to share data on your payment records with CRAs to help improve your score.

  • File your company accounts on time by the deadline. Late filing can indicate financial problems.

  • Keep up to date with your information. Always make sure to inform customers, suppliers, Companies House and CRAs of any changes to your business location or status.

  • Limit the number of credit applications you make. Too many applications in a short time may lead to credit searches being conducted on your business, which are then recorded on your credit record and may look like you are struggling to secure funding.

  • Pay on time wherever possible. Your agreed payment terms are a form of credit, so failure to pay on time will damage your credit rating.

  • Small business owners need to be careful with their personal finances. When you are just starting out or have a small enterprise, your own personal financial data may be used in place of your company data for credit scoring until such a time when the business becomes established.

By following our handy tips you will start to see an improvement in your credit score. It will not happen overnight, but you will be laying strong foundations from which to build a solid score.

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