How to Improve Your Company Credit Score

When applying for any type of finance, many people think about the state of their credit score and its impact 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 and secure lower interest rates.

In this guide, we explore:

How credit scores are calculated
Why they are so important
Seven steps you can take to improve your business’ credit score.

What is a business credit score?

A credit score is a number generated by a credit reference agency. This score summarises the financial health of your business. It refers to elements such as:

The reliability of past payments
Working capital
Outstanding debt
Profitability
Cash flow

This calculates 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 detailed breakdown of a business's credit score and rating, detailing how these scores have been calculated and the business' financials over the last few years. Essentially, it's a complete summary of how a business has handled credit in the past.
Credit ratings refer to a grading that indicates a business's financial health rather than a number. When a business is assessed, it is 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, generally ranging from A+ to F. Meanwhile, some agencies use bronze, silver, and gold to categorise their ratings, so bear this in mind when comparing ratings across different agencies.

Why is a 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 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 a director's personal credit history has been subject to multiple credit searches, this could indicate that they are struggling to obtain finance themselves.

All of this is considered 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 fulfil their company's financial obligations. This is particularly relevant for startups or SMEs who may have less data filed against their company.

If neither your business nor its directors have taken 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 is a business credit score calculated?

Your company credit score is calculated based on a range of financial factors. These typically include:

Payment history. Timely payments on debts and invoices are crucial. Late payments can negatively impact your score.
Credit usage. This is how much of your available credit you're using and keeping this ratio low shows responsible credit management.
Credit history length. Longer histories of responsible credit use generally boost your score.
Public records. Any bankruptcies, judgments, or tax liens can significantly lower your score.
Company size and industry. Credit reference agencies will make comparisons within your industry and the size of your business.

Understanding these factors can help you proactively manage and improve your business credit score over time.

How can I improve my 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 issued if you fail to repay money you owe. They can negatively impact your business's credit score, which is crucial for maintaining good credit control and cash flow. To check if you have any CCJs or to review your credit status, you can request a credit report from a registered credit reference agency. 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 monitor items in the ‘negative’ category and take action if you notice any changes. This can safeguard your rating from further dropping. 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 scores of your suppliers and customers

Monitoring the credit scores of your suppliers and customers is also important. It helps you decide which customers to offer credit terms to and set appropriate credit limits, which can reduce the risk of bad debts. If one of them goes into administration, this early warning lets you take steps to protect your company and its credit score.

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 providing them with up-to-date data will help 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 be regarded as creditworthy. Every time you apply for credit, a note is made on your credit report, whether you’re successful or 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

Filing accounts and tax returns by the deadline is always good practice. Credit reference agencies will include information on whether your accounts have been filed late on company credit reports. Late filings can trigger alarm bells for lenders, as they can indicate poor housekeeping and financial problems.

If you struggle with keeping track of your returns and filings, consider employing an accountant. 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 be unable to repay 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 have a blemish on your company credit score but still need to obtain finance, other options are available. 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 property, using this as collateral against a secured loan may help to offset a low credit score.