Small business owners are navigating a particularly challenging period at the moment, trying to recover and reset post-pandemic, while the cost-of-living crisis is piling more financial pressure on – affecting the cost of running a business as well as the shopping habits of their consumers.
For businesses seeking a loan this year, whether to invest in new premises, staff, innovation or considering support to assist with cashflow, a good understanding of your company’s credit score is a good start.
A business’s credit score is a measure of an organisation’s creditworthiness – made up from a number of factors to understand the financial position of a business and its level of financial risk.
A business credit score can be used in two ways.
As well as being a tool to help you secure the best investment opportunities for your small business, it’s also essential for managing cash flow.
Before entering into long term contracts with new suppliers or clients, running a business credit check to get an insight into their credit rating could show you any hidden red flags and ensure your working relationships don’t result in years of chasing up bad debt. It’s likely they’ll run one on you too, so it pays to keep yours high.
There are some industries such as construction that rely on complex supply chains where business credit is fundamental to their operations. However, growing your business credit rating is essential for every small business, particularly in the early stages when they lack the financial buffers for late or missed payments.
If you’re a sole trader, or a start-up with little financial information available, lenders will use your personal credit score to determine your creditworthiness.
Poor credit rating
Having a good business credit score can save you money in the long run, giving you access to loans with lower interest rates. The opposite is true if your score is low, since you may only be offered higher rates that could impact your finances and ability to grow. A poor credit rating is often one of the main factors leading to a rejected credit application.
Your credit rating is compiled by credit reference agencies to enable companies to assess how you might behave if they lend to you, and the risk of you defaulting. It is based on data from your previous business and credit transactions.
Importantly, it also contains information about how you use credit: how many lines of credit you already have, whether you have missed payments, or if you have exceeded your credit limits.
Improving your business credit score
Credit ratings are a major part of everyday life now; they affect your ability to successfully conduct both your business and personal life. So, it’s important to take care of them, and, if possible, try to improve them.
The first step is to check your credit rating with one of the credit reference agencies, such as Experian. If you spot anything incorrect or out of date, check your record with the other agencies to see if their records are also wrong.
Ask the lender that has supplied the incorrect information to correct the inaccuracy. If they refuse, contact the credit reference agencies to add a “notice of correction” explaining your situation, and, if necessary, take your complaint to the Financial Ombudsman Service.
If the information in your credit report is correct but still causing you problems, you need to repair it. Sort out any inconsistencies, such as different addresses on accounts. Use your landline as a contact number rather than your mobile; it indicates that you are in a stable position.
Take care to make all your payments by the date requested, and in the case of credit cards, try to pay more than the minimum. You may need to improve your cash flow to achieve this by minimising the period between invoicing and receiving payment and negotiating longer terms for paying suppliers.
Try not to use the full amount of credit available to you; this will make prospective lenders nervous. Some experts recommend keeping your business balance at around 20 to 30 per cent of your credit limit.
At the end of every financial year all companies, whether you’re a small sole trader or a medium limited company, must file their accounts, Company Tax Return or Corporation Tax with HM Revenue and Customs (HMRC). These accounts also need to be filed with Companies House.
It’s important to file the accounts on time and fully rather than submitting abbreviated or micro entity accounts. Though it might extend the process, filing the full accounts on time and in line with guidelines can lead to a better business credit rating in the long run.
It takes time to establish a good credit record, and it will help if you don’t make any applications for credit in the meantime. You risk rejection if you do apply, and that could hinder any improvement of your record.
7 steps to improve your business credit scores
- View your business credit report to understand the positive and negative factors in your history and plan the best path for progress
- Make a note of suppliers’ payment terms and plan payments so they are on time. Poor payment performance can indicate a business struggling to service its debts
- File annual returns and financial accounts on time
- Making more information on your business available helps suppliers, utility providers and lenders to understand it and make appropriate decisions
- Avoid County Court Judgments. Should one occur, settle it promptly
- Keep an eye on your personal finances. Directors’ personal credit scores can be considered for new businesses when little information is available
- Appoint a director with a strong history of running companies and a good credit score to help boost your company’s standing
- Check and monitor the credit status of the companies you work with, so you can anticipate any supply chain problems before it affects your business
James McGarva is managing director of business information at Experian