What is a business credit score and why is it important to your business?
Credit scores are used by the external market to assess a business’ strength. They are becoming an increasingly important measure of a company’s likely future stability for businesses and lenders.
This may mean your potential suppliers, lenders or customers could check your credit score before they decide if, and how, they wish to trade with your company.
This is especially important as we’ve seen trading conditions over the past couple of years worsen. Many businesses are experiencing weaker balance sheets and as a result, credit scores in many sectors are lower than they were.
This article will help you understand how credit scores are set, the way they impact your business cashflow and how to improve your credit score quickly.
How are credit scores set?
There are several credit reference agencies in the UK who all calculate their scores slightly differently, based on their own data intelligence and research.
However, all are likely to consider many similar factors around your financial results and credit behaviour.
The agencies will obtain details of your company and your financial results which you file at Companies House. They will also receive information directly from banks, lenders and major companies to track your bank and credit balances and payment performance.
There is a wealth of data in the public domain for your business including your company’s registered address, business accounts, filing history and credit score. So, it’s key that you know what your score looks like.
Sign up for free to check your Experian-powered business credit score.
The link between credit scores and cashflow
Many companies will set their terms, sometimes even their unit prices, based on a customer’s credit score. The riskier that company appears, the less attractive your terms will be.
Similarly, banks and other lenders will set rates of interest based on their assessment of risk, quoting higher rates for what are seen as ‘riskier’ businesses.
This means your credit score is key in maintaining a healthy cashflow or accessing funds you may need to pay for overheads or leap for growth.
It’s important to remember that trade credit from your suppliers is effectively free cashflow. The more you maximise your internal working capital (i.e. get paid quicker from your customers), the less you will need to borrow from external sources and the more cashflow you’ll have at your disposal. (We cover this below in point 9).
However, if you do need to borrow to fund your business and growth, lower rates of interest will help your profitability alongside your day-to-day cashflow.
As mentioned above, lower interest rates and more attractive supplier terms are normally achieved with a higher credit score.
How to improve your business credit score
Improving a business credit score quickly is the focus for many business owners. Here’s 10 ways you can start improving yours.
1. Make sure your information on company's house is up to date and your accounts are filed on time or as early as possible
There is a trend amongst small businesses to limit the financial information which is in the public domain. However, this can make your score lower as the less information the credit references have, the more they have to assume.
Over the next few years Companies House will change their requirements and all companies will be expected to file a profit and loss account anyway. Generally, the more information you can file, the more accurate your credit score will be.
2. Make regular payments on time
Paying your suppliers and accounts on time and in full every month is key to a healthy score as it shows your business can afford the money borrowed. Many large companies send payment performance data to the credit reference agencies. You should prioritise paying these suppliers on time so that your credit behaviour always looks impressive.
Every company will have different suppliers and you should look at the list of those you pay. Focus on large and national companies as a minimum, such as utility companies.
This should also include keeping within credit limits and overdraft facilities for any banks or lenders and making all payments on due dates.
3. Make sure your personal finances are healthy
As with your business accounts, you should focus on keeping your personal accounts healthy and strong. This means paying your personal bills on time, as these can affect your business credit score if you're the director.
4. Apply for finance only when you need to
It can be tempting to apply for finance when you’re thinking about your next business move. In some cases, finance is exactly what you need to expand or grow. However, holding too much debt in the business or making too many applications in a short period of time can have a negative impact on your score.
If you are thinking about finance, try checking your eligibility first before you submit an application.
5. Use your business bank account regularly
Using your business bank account regularly and consistently can prove your business is successfully managing accounts and paying creditors. Banks and lenders often reward businesses who show signs of consistent positive transactions.
If you have any dormant or low activity accounts, consider shutting these down so they don’t worsen your business credit score.
6. Consider using a credit card to improve your score
Credit cards can be a good solution to help improve your business credit. This is because opening a new line of credit increases your available business credit - positively impacting your score. If your balance is low, but credit stays high - then your business is seen as performing well.
Credit cards can also help you establish a strong payment history, as over a period of time you can showcase that you are regularly and consistently keeping up with payments. However, do consider that when opening a new credit card, a hard search will be issued on your business.
7. Monitor your credit profile to spot risks or errors ahead of time
Monitoring your credit profile is key to ensuring it’s improvement. Understanding and monitoring your score can help you spot increases, decreases and risk factors. As well as any mistakes, early on - so you can resolve these quickly.
Capitalise for Business is a tool that can help you:
- Check your credit score and see how you compare to similar businesses
- Discover what’s impacting your score, including any legal notices
- Get alerts about any changes to your business credit score
- Improve your credit score with tailored advice and support
Find out more about Capitalise for Business.
8. Avoid any legal notices or County Court Judgement (CCJs)
If a company or HMRC issues you with a statutory letter, which used to be 7 days in advance of any action, but is now 21 days, you need to act quickly.
If these reach the court process as a County Court Judgment, they will remain on your credit record for six years, even if you eventually pay the debt owed, when it is shown as ‘satisfied’. However, if you pay the debt in full within one month, you can have it removed from the register.
If a creditor or HMRC issues your company with a winding-up petition, this will be listed as a notice in the “Gazette” in London, Edinburgh or Belfast. Even if this doesn’t reach the court process, that notice will remain on your record and will affect your business credit score.
You can see that “Red” letters chasing for payment, or emails, should not be ignored as they can quickly escalate.
9.Build a strong relationship with your suppliers
Welcoming and building strong communication with your suppliers can help you boost collaboration. This means you can build a stronger working relationship, where logistical issues are solved quicker and payment transactions feel more transparent. In fact, 71% of small business leaders say that personal relationships with their suppliers helps them do better business.
A strong relationship with the businesses you work with can help build greater trust and help you obtain better payment terms, or limit any unexpected payment delays. Which helps you protect your business cashflow and the ability to make other business payments on time.
10. See if you could get an instant score boost
We’ve mentioned just some of the steps you can take to improve your business credit score. However, it’s no secret that there are almost 100 things that can have an impact, so it can be tricky to find out exactly what is impacting yours.
If you want to get a head start on your journey, we’ve partnered with one of the UKs leading credit bureaus, Experian, we help find out those credit risks and even check its accuracy.
With our market-leading business credit tools you can:
- Check your own business credit score
- Get insights into your credit and your credit risks
- See your payment performance data
- Credit check the companies you work with to minimise the chance of bad debts
- Get your credit score reviewed - to check its correct
We’ll review your business profile and full set of accounts to check your business credit score accuracy. And get back to you in as little as five working days to see if your score has been improved. Find out more about the Credit Review Service.
Gain control over your business credit score, fast.
Speak to your accountant for more information or sign up for Capitalise For Business today to spot any credit risks associated with your business. Here you can sign up to a free account to understand your credit profile. Or, for less than £1 per day, you can also be alerted to any changes to your credit score and also monitor the financial health of your own customers.
Ready to get started? Sign up to Capitalise for free
Article originally published 09/11/2022
Updated 12/01/2023
