When applying for any type of finance, many people’s thoughts turn to the state of their credit score and the impact it may have on their overall finance application. This is also the case for business finance – a good company credit score can make it easier to get approved for funding, along with helping you to secure lower interest rates. In this guide, we explore how credit scores are calculated, why they are so important and seven steps you can take to improve the credit score of your business.
What is a credit score?
A credit score is a number generated by a credit reference agency which summarizes the financial health of your business. It refers to elements such as the reliability of past payments, working capital, outstanding debt, and cash flow, in order to calculate how likely you are to default on future payments.
The terms 'credit rating' and 'credit report' are often used interchangeably with 'credit score', but each refers to a slightly different value:
- A credit report is a full break-down of a business' credit score and credit rating, with details of how these scores have been calculated. Essentially, it's a complete summary of how a business has handled credit in the past.
- Credit ratings refer to a grading to signify the financial health of a business as opposed to a number. When a business is assessed, they are given both a credit score, and a credit rating.
- It's worth noting that credit score calculations will vary from agency to agency, so a score of 500 from one agency may mean 500/1000 whereas with another agency it may mean 500/700.
- Ratings or grades can also vary from agency to agency - going from A+ to F in some while dipping to 'G' or even 'I' in others. Meanwhile, some agencies will use bronze, silver and gold to categorize their ratings, so bear this in mind when comparing ratings across different agencies.
Why is a business’ credit score important?
A company credit score is a vital piece of information that banks and lenders will look at when reviewing finance applications. To them, it’s a summary of whether you have difficulty managing your debt. As such, they’ll often use your credit score to define the rates and terms of your loan. Good credit scores will mean your loan will be less expensive overall, due to you posing less of a financial risk to the lender.
Credit scores are also important for securing contracts with clients - your customers and suppliers may well check your company credit report as part of their due diligence before signing any contracts. This is to ensure your business is in a healthy financial state and to gauge the probability of you going into liquidation or failing to pay their invoices whilst undergoing business.
What about a director's personal score?
The personal credit score of company directors does have an influence on a company's overall credit score. Credit reference agencies will look at:
- Late payments on personal credit accounts of directors
- Disqualified directors associated with the business
- Recent credit searches - if there have been multiple credit searches on a director's personal credit history, this could signify that they are struggling to obtain finance themselves.
All of this is taken into account when compiling a company's credit report. Overall, a director's financial conduct and credit payment history will influence how credit reference agencies view the director's ability to fulfill their company's financial obligations. This is particularly relevant for startups or SMEs who may have less data filed against their company.
If both your business and its directors haven't had to take out credit in the past, you'll have what credit reference agencies refer to as a 'thin file' which means they don't have much data to refer to when assessing your credit history. In this instance, taking out a credit card can be a good way to build your credit history - each payment will help to build a positive credit rating.
How can I improve my company credit score?There are several steps you can take to improve your company credit score:
1. Pay on time
Whether you're paying suppliers or financial lenders, be sure to pay your invoices and debts on time. Credit repayment history is reviewed by all credit agencies, so pay your accounts off early whenever you’re in a position to do so. Prompt payments will indicate to lenders that you can successfully manage your cash flow and debts.
It’s worth noting that if you have a late payment marker recorded on your credit profile, it will remain there for six years.
2. Avoid County Court Judgements (CCJs)
CCJs are court orders which are registered against if you fail to repay money you owe. If you don’t pay a CCJ within twenty-eight days of receiving the judgement, it will remain on your credit profile for six years, and even the simple fact that a debt collector has accessed your credit file can remain on record for two years.
If you do get a CCJ, pay it immediately. A CCJ will never come out of the blue – you’ll receive a warning letter or default notice from the creditor beforehand so it’s vital you repay before legal action is taken and a CCJ is taken out against you.
3. Make changes if you notice a drop
Regularly checking your business' credit score is crucial to maintaining good credit control and cash flow. You can check your credit report by contacting credit reference agencies who can compile data from the public domain regarding your company.
It’s good practice to regularly purchase such reports to keep an eye on any items in the ‘negative’ category, and to take action if you notice any changes. This can safeguard your rating from dropping further. Look out for outdated information, or data that may point to identity theft.
Moreover, because each credit reference agency will use a slightly different algorithm to calculate scores, it’s always a good idea to regularly check more than one agency's rating, so that you have access to a substantial amount of data types.
4. Check the credit score of your suppliers and customers
Monitoring the credit score of your suppliers and customers is also important, as it means you have a heads-up if one of them goes into administration. If this is the case, being forewarned will mean you can take steps to ensure your own company and its credit score aren't implicated.
5. Share data with a credit reference agency
If your business is in a good financial position, share information regularly with credit reference agencies. Their credit reports involve checking the information on your record, so if you provide them with up-to-date data it will help to maintain an accurate credit score.
It's also worth checking if any banks or alternative lenders who you have loans with report to a credit reference agency, as having a good payment history with a lender could boost your credit rating.
6. Don’t apply for credit unless you need to
Good cash flow is vital to being regarded as creditworthy. Every time you apply for credit, a note is made on your credit report, no matter if you’re successful for not. Each loan rejection has the potential to put a blemish on your credit score.
Moreover, if you make several credit applications in a short space of time this may lead to credit searches on your business. Credit searches are generally recorded on your credit rating and too many in a short period of time is an indicator that you’re struggling financially and failing to obtain funding.
7. File on time
It’s always good practice to file accounts and tax returns by the deadline. Credit reference agencies will include information on whether your accounts have been filed late on company credit reports. This can trigger alarm bells for lenders, as it can be an indicator of poor housekeeping and financial problems.
If you struggle with keeping on top of your returns and filing, consider employing an accountant, as credit reference agencies also look at whether your accounts have been audited and the quality of information filed against your business.
Can I still take out a loan with a bad credit score?
Having a good credit score can help you get a better interest rate on a business loan or credit card, and can also mean you get better terms from your suppliers. Missed payments or a bad credit score will indicate to lenders that you may not be able to pay back your debt. This means that banks may offer you a product with higher interest rates or they may reject you for finance altogether.
If you do have a blemish on your company credit score but still need to obtain finance, there are other options available to you. Some alternative lenders will still consider your finance application and allow you to use a personal guarantor who will be liable to pay if you default. If you also have valuable assets, such as a property, using this as collateral against a secured loan may help to offset a low credit score.