Most people are aware that they have a personal credit score. But did you know that your business has one too?
If your business credit score is alien to you, don’t worry too much. Experian is one of a number of Credit Reference Agencies who collect your credit information and it estimates that almost two-thirds of business owners have never checked their credit score. While almost 90% say they couldn’t tell you exactly what goes into it either. So, you’re not alone.
In this article, we’ll take a look at:
- Why your business credit score is important.
- What affects your business credit score.
- The steps you can take to improve your business credit score.
- What finance options may be available to you if your business credit score isn’t as good as you’d like it to be.
Why is my credit score important?
Your business credit score works in a similar way to your personal one. It’s one of the factors used by banks and other lenders (and investors) to make decisions about lending or investments.
This can be important when it comes to applying for debt finance. If you want to take out a Business Loan, Overdraft, or another form of debt, your business credit score will play a key role in determining factors such as how much you’ll be able to borrow, what your interest rate will be – and whether you’ll be approved for a loan at all.
There are other implications too. Unlike a personal credit score, your business credit score is publicly available.
Smart customers, suppliers and other companies may check your business credit score. It could come into play in day-to-day business dealings, for example when you’re negotiating contracts or tenders, or when you’re looking for insurance.
What affects my credit score, and how can I improve it?
Your business credit score is developed through a combination of factors. One of the most obvious – and influential – is often considered to be whether you pay your bills on time.
We’re not just talking about utility bills, but also your invoices and other creditors. Continually late or missed payments could have a negative impact on your business credit score.
But there are lots of other contributors to a credit score too – from how many times you’ve applied for credit in the past, to exceeding overdraft limits, to whether you file your business accounts on time (if applicable).
It means there’s no quick fix to boosting your score, but, by knowing how your business credit score is compiled, you could consider taking some steps to try to improve it. Particularly if you need to or you feel it’s holding you back.
The following is not an exhaustive list and does not guarantee that your business credit score will be improved as a result.
Be prompt on payments
Your credit score may improve if you pay invoices on time. It may also improve if you pay your creditors early too.
Punctual repayments shouldn’t just take into account traditional bills and credit repayments either. Other creditors, fines or fees may also factor in your business credit score.
Keep your business up to date
A credit score isn’t simply compiled on the moments when money changes hands. You may also gain rating points by ensuring that you are keeping your business information updated in key places.
Filing your business accounts with Companies House on time, and always submitting accounts and tax returns by any set deadlines, may also help you credit score.
Keeping directories and Credit Reference Agencies (who are known commonly as CRAs and are responsible for collecting your credit information) up to date with relevant information could help to indicate an organised and competent business.
Limit your credit checks
If you apply for credit, your application goes on your record. Each credit search builds up to form a picture of your business’ health.
If you’re making lots of applications and completing lots of applications, it could negatively impact your score and ability to access finance.
Keep your personal finances in check
Business and personal credit ratings tend to be kept separate, but there are some finance types (and even some credit rating products) that take both into account, so don’t forget one without the other.
If your business credit score is low – perhaps you’ve had too many failed credit applications – then having a strong personal credit rating could go some way to improving your ability to access finance from lenders.
Stay on top of your score
Knowing what makes up your credit rating isn’t just helpful for future planning, it could help you confirm that your score is accurate.
With so many contributing factors to the score, it may be that there are some discrepancies that need correcting. Ensuring that the information is accurate and up to date could help the application process.
It’s also worth being aware that each Credit Reference Agency has slightly different criteria and uses different information from different lenders to compile your score. This means that your credit rating may be higher with some agencies than others, so do your due diligence.
I’m looking for finance. What are my options if my credit score is poor?
As well as reviewing factors that may impact on your credit rating, there are further options you may wish to consider if your credit score is poor and you’re looking for finance to grow your business.
Again, these are suggestions only and do not guarantee that you will obtain finance as a result.
Look into all debt options
If you’re focused on debt finance, then consider the range of options available to you. As well as more well-known products like Overdrafts and Business Loans, there are other options available too.
For instance, even though it still requires a credit check, 94% of Leasing and Hire Purchase loan applications are successful. Leasing and Hire Purchase is often used to help businesses acquire equipment, machinery and vehicles, and doesn’t necessarily require you to be profitable, just cash positive.
A poor credit rating could make approval more difficult, but it’s not always a barrier. Explore other finance options here.
Explore equity too
You may find it worthwhile looking in to other forms of finance, away from debt, too.
Equity investment takes many different forms and could be an option instead of or as well as debt finance. If you don’t want to sell a stake in your business, you may prefer to choose a loan. But if your business is ready for further investment, then Equity finance may be for you.
There are lots of different forms of equity you could explore. For example, Angel Investment and Equity Crowdfunding can both offer early-stage businesses cash injections to help them grow, and may look at a business beyond credit ratings when making a decision to invest.
Remember that while your credit score will be an influence, investors may also be focused on how much they believe in the product, the business plan or the business leaders themselves.
“Making an offer of equity or bonds through a crowdfunding offer means your business will need to be ready for due diligence by ordinary investors who will look at you in more detail than a credit score. After all, it is their own money they are investing.”
|Bruce Davis Director, UK Crowdfunding Association|
With so much to keep you busy when running a small company, keeping on top of your business credit score may never have seemed a high priority. But it’s a key component of your business’ DNA.
Being aware of your rating, and making conscious efforts to maintain or change it, could play an important role in keeping your business one step ahead of the game.