How to improve your business credit score
Most people know that if you use credit to make a purchase, whether it’s a new phone, car or house, you’ll have a personal credit score. But if your company has ever borrowed money, it will also have a credit score that’s separate from your personal finances. That's important.
By looking at public records such as bankruptcies and county court judgements, your payment performance, and any outstanding debts, credit reference agencies (CRAs) rate your company’s financial health. The higher your score, the more likely you are to be offered finance for your business on favourable terms.
Because a credit score reflects the current state of a business’s finances, you can give yours a boost by showing CRAs that you’re in a stable, positive position. Here are five tips to get you started.
1. Find out your current credit score
Before taking steps to improve your business credit score, it’s worth checking where you stand by getting a credit report from a UK-approved agency such as Equifax, CreditSafe and Experian. If you’ve heard that checking your report too often can hurt your score—don’t worry.
Monitoring your score through a CRA is a ‘soft check’, which means it is not considered a signal to lenders that you might be in financial trouble. ‘Hard checks’ are when you make actual credit applications, too many of which in a short space of time could harm your score. Once you know your all-important number, which is usually between 0 and 100, you’ll have an idea of how much room there is for improvement.
2. Always make payments on time
It’s an obvious but important point. Late or missed payments on things like business credit cards and company invoices can be seen as red flags by CRAs. Being organised and making all payments on time will improve your credit score and stand your business in good stead when applying for credit in the future.
Also bear in mind that if financial data on your business is limited, information on payments in your personal life may sometimes be used as an indicator of risk.
3. Establish credit
Businesses with the best credit scores aren’t necessarily the ones that have never borrowed money. Without a history of using credit responsibly, CRAs don’t have much to go on, so try to establish a credit facility to get your record started. According to Experian, applying for and using an overdraft doesn’t count, and neither does simply being ‘in credit’ (i.e. having a healthy bank balance).
Instead, you’ll need to borrow using a business credit card or by taking out a loan, but it’s vital you don’t borrow beyond your means and repay in full and on time each month, otherwise, the line of credit could do more harm than good.
It’s worth checking the credit positions of new suppliers and clients too. If they have a history of being unreliable, they could put extra pressure on your cash flow by missing or delaying payments or the delivery of supplies.
4. File your accounts on time and in full
Filing your accounts with Companies House in good time and in full can improve your credit score. Credit reference agencies use this information as a factor when assessing your financial health.
The earlier you can submit your accounts the better, as filing at the last minute could mean credit agencies aren’t able to access the information when they request it and will presume your accounts weren’t filed on time, which could negatively affect your credit score.
5. Keep your credit utilisation ratio under control
Your credit utilisation is the proportion of credit you use of the total amount that’s made available by a bank or other lender. It’s another of the factors CRAs use when figuring out your credit score. Let’s say, for example, that you have a business credit card with a £1,000 monthly limit.
If you use an average of £200 per month, your credit utilisation ratio will be 20%. The aim with credit utilisation is to keep it as low as possible—ClearScore recommends under 30%, or even under 20%, if you can.
One way to decrease your credit utilisation ratio is to reduce your spending. If this isn’t an option, you could try asking your lender to increase your limit or open a new line of credit. Be careful though, as too many active lines of credit may not be looked on favourably by lenders.
The benefits of building a strong reputation in the minds of your customers and clients are obvious, but looking good to lenders can be just as important when it comes time to secure business finance.
Not every up and down of your business, such as moving to a bigger office, letting employees go, or using an overdraft, makes a difference to your credit score, but getting right the five fundamentals we’ve covered should help move it up in the right direction.