Lucy - BQ Magazine EditorPeople often only think of their credit scores when they need to take out things like personal loans or car finance or they’re preparing for a mortgage application. While it’s a vital aspect of all these activities, a better credit score can afford you more preferable rates and a greater chance of acceptance for any financial applications. But, it’s not just a personal credit score you need to be concerned with if you run a business.
Why Understanding Your Business Credit Score Matters
Understanding and managing your business credit score is a crucial aspect of your financial strategy as a business owner. According to Experian, around 66% of business owners have never checked their business credit score or even knew they had one. This lack of awareness can be a significant barrier, especially for units requiring additional funding.
By taking control of your business credit score, you can make informed financial decisions and unlock more opportunities for your business.
What Your Business Credit Score Reflects
Your business credit score is a reflection of your business’s financial health. It alerts other lenders, much like your personal score, to how reliable you are as a borrower and how much of a financial risk your business is. A better score signifies a healthier financial position, while a lower score indicates potential risk.
Understanding this impact can motivate you to take steps to improve your business credit score and secure better financial opportunities for your business.
Elements That Influence Your Business Credit Score
This reliability is an overview of aspects of final decisions, such as
- Your business’s ability to pay its bills on time
- The levels of debt a business has
- The type of credit you have
- The length of time you have had or have any business debt
- How frequently do you apply for or open new credit accounts
- Company accounts
Accounts Considered in Business Credit Score Calculations
What accounts will be considered when calculating your business credit score?
- Credit cards related to the business
- Trade accounts
- Business loans
- Utility bill
- Business rates
- Rent or mortgage payments are taken out as the business
How Business Credit Scores Are Measured
Typically, scoring ranges from 0 to 100 (credit reference agency department), and it scores like your personal one, but instead of being indicative of how well you handle credit, it’s how your business handles credit. However, in some cases, lending institutions might obtain both personal and business credit scores for applications for financial assistance, especially in the early days of running a business.
The Impact of a Low vs. High Business Credit Score
The lower your score, i.e., the closer to 0 it is, the more of a risk you will be. This means you might be limited in your lending options and reliant on bad credit business loans to help you out when you need a cash boost. A low score can significantly restrict your business’s growth and financial flexibility. Conversely, the closer to 100 your score is, the more options and better deals you will be able to unlock as a business.
Steps to Boost Your Business Credit Score
Let’s take a look at some ways you can preserve or boost your business credit score to bolster your business and open up your lending options when you need them.
File Full Accounts
If you are a limited company, it’s a good idea to always file full, not abbreviated, accounts with Companies House. The more detailed your accounts, the more comprehensive a view lenders can have of your company records and the better impression they will have of your transparency and reliability, as you might appear to look like you have something to hide if you only file abbreviated accounts.
Pay on Time
One of the most important factors in maintaining a healthy business credit score is paying your bills on time. Whether it’s clearing trade accounts, making required payments on time, or paying your business credit cards in full each month, timely payments demonstrate your business’s financial responsibility.
By making this a priority, you can proactively manage your business credit score and improve your financial standing.
File on Time
Filing your accounts on time is just as important as filing full, not abbreviated accounts. If you are late in filing your accounts with Companies House, it might indicate to lenders that you are having financial issues or that something is amiss, thus impacting your credit score or your ability to access credit when you need it.
Limit Credit Applications
It seems like a good idea to access as much credit as you can while you’re being accepted, right? Actually, no. Multiple or frequent credit applications against your business can signal that you are in desperate need of money, which is enough to make lenders wary.
Suppose you’re making multiple payments from different lenders’ types of credit or amounts. In that case, lenders will be less inclined to accept your application in the event you struggle to meet your financial obligations, and this makes you a more risky borrower.
Quotes not Applications
Where possible, always ask for quotations when applying for business finance. This isn’t always possible for some types of credit or accounts for your business, but you might be able to obtain quotations, which can limit your need to make multiple applications.
Alternatively, using soft searches can reduce the number of applications showing your file and give you an idea of what you might be accepted for.
Update Information
It’s always a good idea to ensure all of your company details are up to date and all the information is current and relevant. This includes changes to your business location or status, as inconsistent details or neglecting to inform customers, vendors, lenders, etc., might make you seem unreliable, or you’re trying to hide something.
Track Partners
Did you know that the credit position of your business partners, i.e. customers or suppliers, can impact your credit score? If you do business with people who are also deemed risky, this can have a knock-on effect on your own business and get you into trouble if they go into administration, for example.
So not only do you need to monitor your own position, but also those who can impact you, too. I.e. their failure to pay you restricts your ability to make payments on time or will impact cash flow, resulting in your need to make credit applications. It’s crucial to keep an eye on this aspect to protect your own credit score.
Make Use of Your Bank Account
Having a business bank account is always a good idea, and it can be a good way to boost your business credit score. However, it’s not enough to simply have one. You need to use it to make regular deposits and ensure you have proof of your turnover and affordability when making applications.
This trail can prove your ability to meet repayments for financial obligations and be a record of how much money is going through the business.
Also, ensure you keep enough money in your accounts to meet your outgoings on time and cover all payments that are due. This makes sure your account has enough money to clear cheques to be cashed so they don’t bounce, that your standing orders and direct debits go through, and you can cover any online payments you need to make.
This again reinforces your position as a responsible business that can meet its financial obligations and ensure it’s in a good position.
Avoid CCJS
CCJs are County Court Judgements, and they are given to people and businesses who fail to meet the repayment terms of any credit agreement they take out, and they are a mark on your credit file for 6 years.
And even if you pay it off and demonstrate better financial behaviours post CCJ, the filing will still be visible for 6 years after the award date and impact your credit score for this period.
Keep Good Personal Finances
While your business score and your personal score are entirely different entities, there is always a possibility, especially in the early days of your business, that your personal score will be used when making applications.
If you’ve not built up enough history for lenders to make a decision, or your business score isn’t as good as it could be, lenders might lean on your personal credit score. If this, too, isn’t healthy, it will work against you and make obtaining business harder than it needs to be.
With this in mind, demonstrating healthy financial behaviour both personally and professionally can help you improve your chances of obtaining credit when you need it.
Boosting Your Business Credit Score
Poor financial behaviour, both as your business and personally, can harm your credit score and make obtaining credit more difficult. While it is always a good idea to limit how much debt you hold at all in a business capacity, having that lifeline can be massively beneficial. And if you need money for any reason, i.e., for funding growth, acquiring equipment or stock, helping expand business premises, etc., being able to guarantee acceptance or obtain preferable rates is something to aim for.
This can keep the cost of your lending down and help you unlock more favourable terms for your repayments from the lenders.
So, in conclusion, pay your bills on time, limit your credit applications, pay attention to your account, and practise healthy financial habits. All of this will accumulate over time, giving you the best credit score possible for your business.