As a business owner, you’re probably aware of credit scores. In 2020, having a good credit score is essential for gaining funding, making business relationships, and proving your company’s financial stability. In this article, I will outline what a credit score is, what factors influence it, and ways you can improve your rating.
What is a credit score?
To understand how to boost your business credit score, you will first need to understand what a credit score is and what factors contribute to it.
A credit score is a number issued to an individual or business that identifies their creditworthiness, or reliability to pay off debts.
The score is based on a number of factors from past credit history and debt payments, in which the higher the number, the better the score. If you have a higher score, then you are more likely to receive financial backing or loans with a lower interest rate.
A personal credit score is different from a business credit score. A personal credit score will be determined by your previous repayment history, your current credit utilisation ratio, and how long you have had a credit history.
On the other hand, a business credit score will use different criteria to determine the overall health and stability of your company.
Why a business credit score is important
Every business, regardless of size and business structure, should be aware of their credit score. It’s not just a number, it can greatly affect the success of your company. The main benefits of a high credit score include:
- Obtaining loan financing quicker with lower interest rates
- Better repayment terms with vendors and suppliers
- Protecting your personal finances
- More opportunities to access cash for expansion projects
The credit scoring system
For business credit scores, there are 3 main credit reference agencies in the UK: Equifax, Experian, and Dun & Bradstreet. For personal credit scores, the numbers vary based on the agency, with scores ranging between 0 - 999. For business credit scores, all agencies use a similar scoring system of 0 - 100.
Depending on the credit agency you use, the thresholds may differ slightly, however, they all follow the same sort of system.
If you have a high-risk score, this means that you are likely to default on payments or repay debt very late. If you have a low-risk score, this means that you will likely repay a debt on time, or before the due date.
How do I check my business credit score?
You can check your business credit score with one of the reference agencies (Equifax, Experian, and Dun & Bradstreet), but you may have to pay a small fee or sign up for a monthly subscription.
You will need your company registration number and a few details of your business. Only a director or business owner can request a full credit report for their business.
What factors determine your business credit score?
If you are a business owner, it is very important to understand what factors will affect your business credit score. The score can affect your business finances, relationships, and potential funding.
There are a number of factors that the credit reference agencies use to calculate your business credit score. For both limited and non-limited companies, they use information from banking providers, credit card companies, Companies House, and any public records.
Some other factors that may influence your score are:
- How long the business has been operating
- If the business is registered with Companies House
- The size of the company
- The previous financial history of the business owner
- The financial potential of the business (net worth, liabilities, cash flow, etc.)
- Previous audits of the business
Ways to improve your business credit score
Now that you understand what credit scores are, why they are important, and how to access them, we can now discuss how to improve your business score.
Always pay your bills on time
First and foremost, paying your bills on time will have a major impact on your credit score. Most credit rating agencies will gather monthly data from your suppliers and update your credit score accordingly. Therefore, you should always try to pay off your bills on, or preferably before, the due date.
Don’t make too many credit applications
Each of these applications for credit or loans can be seen by potential lenders in a quick search. If you make several applications, the lender may view this information as your company having cash flow issues.
Keep credit card balances low
Credit cards are there for a reason, and you should certainly use them. However, you should try to keep your balance below 30% and not use too many credit cards with balances spread across them. If you max out your cards or have too many business credit cards, this may appear to lenders that your company is unstable.
Lenders will look at your credit utilisation ratio which is calculated by how much you currently owe divided by the total amount of revolving credit that you have available. To keep the ratio low, you can pay off your balances more than once a month, ask your credit card provider for a limit increase, or decrease your credit card spending overall.
Avoid County Court Judgements (CCJ)
A County Court Judgement (CCJ) is a document sent to a borrower in the case that the borrower owes another party money. If your business receives a CCJ, even for a small amount, this will have a negative impact on your score.
Do not close accounts
If you’ve finally paid off a large credit card balance, or amount owing on a line of credit, you may be tempted to close the account to avoid future spending. However, it is beneficial to keep these accounts open, even if they are completely paid off. This will show lenders your previous credit history, and having a long history, as well as previous debt that was paid, can benefit your score.
Check your credit report on a regular basis
Check your business credit score on a regular basis, and if you notice that the score may be incorrect, contact the credit agency to fix the issue as soon as possible.
Retain profit
Retaining business profit will show potential lenders that your business is stable, and you are investing in the business. This will also increase the net worth of the company, contributing to the overall financial health of the business and reflect on your accounting reports.
Stay on top of your accounting
If you file your accounts late, this can have a huge impact on your credit score, sometimes up to 50%. You should keep track of your overall business accounting and review accounting reports on a regular basis.
Invoicing software can help you create and send invoices, record expenses, and keep track of your balance sheet, profit & loss statement, and VAT reports.
With software like Debitoor, you can view your revenue and losses for any period in real-time. You will also be able to keep track of specific sales, as well as the overall stability of your company.
You can also connect directly to HMRC to submit your VAT returns, and easily access your balance sheet and profit and loss statements to help you complete your company tax returns.
In summary, every business should keep track of their business credit score and try to improve it in any way possible. Potential lenders, as well as customers and suppliers, will be able to access your score and this could impact your business.
