The complete guide to improving your business credit score

The impact of a person's personal credit score on purchases and investments is well known to most people. Not all business owners are aware of how their business credit score can impact their access to loans, contracts, and other financial resources.

According to UK government statistics, 88.3% of startups survive their first year, but only 39.6% survive five years. The reason for this is often that their finance options are limited. Developing a positive credit history takes time, but the rewards are worth it.

Checking your business credit score, understanding why it's relevant, and interpreting your business credit report are all explained in this guide. After that, we'll share fourteen tips for improving your business credit score.

The importance of your business credit score

Your credit score shows lenders that you're more likely to repay your debts and make your payments on time. You will be able to access competitive interest rates and credit if you maintain a high credit score.

Poor business credit scores can be caused by missed loan repayments in the past, or by failing several credit applications. In the event that you're able to obtain credit, you'll likely be offered high interest rates if your credit score is low.

It may also be a smart idea to work with a business partner. Low business credit scores may cause potential business partners to view your business as risky.

To be able to access the best credit, insurance, low-interest loans, and other valuable financial resources throughout the life of your business, you must maintain a good business credit score.

What determines your business credit score

There is usually a range of 0 to 100 points for business credit scores. The higher the credit score, the better the company's performance and creditworthiness, indicating low risk for potential lenders. Nevertheless, the closer a business's credit score gets to zero, the higher the risk and the less likely it is to be approved.

A Credit Reference Agency (CRA) calculates your business credit score based on certain criteria, and each CRA may have a slightly different scoring range. It will review your financial history and track your payment history for previous business loans and borrowings, as well as your payment timeliness.

The following aspects of your financial history may be evaluated:

  • Size and age of your business

  • Your industry

  • Business location

  • Past repayment history if your business has borrowed before

  • The amount of existing credit available to your company

  • Number of past applications for finance (and whether you were successful or denied)

  • Trade credits you may have secured

  • Existing company accounts

  • Details of ownership

  • Outstanding County Court Judgements

From the speed at which you pay your bills to your likelihood of defaulting on payments, credit scores can be assessed based on a variety of factors. Vendors, suppliers, and lenders will ultimately judge how likely you are to do business with them based on your business credit score.

Check your credit score

Business credit scores can be checked by contacting a credit reporting company such as Equifax, Experian or Creditsafe. The company may send you your credit report by mail, email, or by giving you access to your score online.

Company credit files contain information from a variety of sources, including the Registry Trust, which holds details of County Court Judgments, and Companies House.

There is no standard method for calculating your business's credit score, so there is no definitive score for your business. Since each credit bureau uses its own methods and scoring systems, you'll find varying results. When lenders check your credit score, they will use different credit reporting companies.

You can review your business credit report with each agency and find out how much it will cost. Some agencies charge a monthly fee while others charge a one-time fee. Your credit report can usually be accessed for six months or a year by paying once.

How does a business credit report work?

Business credit reports provide detailed information about your business and your customers. The following items are typically included in a business credit report:

  • Business background information

  • Company financial information

  • Business credit score and potential risk factors

  • Summary of banking, trade and collection history

  • Summary of liens, judgements and bankruptcies

Your business credit report will contain different information depending on which credit reporting agency you use. Using the report, you can see how financial institutions and other businesses perceive your company's financial health at a glance.

The four most compelling reasons to monitor your business's credit report

In order to make informed financial decisions, it is recommended that you consistently monitor your credit score after running a credit check. Keep a close eye on your report even if you have a near-perfect score to avoid performance dips.

Your business credit report can be affected by a variety of factors, so tracking your progress will help you stay on top of things. Your credit score can be affected by everything from transaction volume to outstanding balances.

Let's take a closer look at some of the reasons why you should monitor your business credit report.

Assess the credit risk of a partnership

Assessing the financial risk of extending credit to a certain company is one way to actively avoid making poor credit decisions. 

In this effort, you can obtain financial information on a business, including judgements, liens, and bankruptcies. You'll be able to make a better decision about the pros and cons of partnering with a company if you discover it presents a financial risk.

The credit score changes over time

You can keep track of your score by monitoring your credit report. By keeping a pulse on your credit wellbeing, you'll be able to make smarter cash flow decisions, maintaining your interest rate low and credit score high.

You can also be alerted if someone requests and views your credit information before working with you if you keep track of your credit score. It's a helpful sign when a potential business partner does this because it shows they care about their potential partners' financial health. 

Be on the lookout for fraud and errors

You can also monitor your credit report for errors by keeping an eye on your credit score. Having outdated or inaccurate information on your credit report could negatively affect your status without your knowledge. If you do not correct the mistake, you may miss out on loans or be quoted high interest rates.

You can also report any fraud as soon as it occurs by monitoring your credit file.

Your company's credit report should be investigated if you notice any activity you don't recognize. To avoid fraud, notify the credit bureau as soon as you see suspicious activity.

Change for the better

Some credit reports recommend ways to improve your credit score. Analyzing their suggestions can help you review the report and determine what needs to be addressed to improve your score.

Maintaining a record of your company's credit score will help you manage and improve your business credit so you can expand your business.

There are three key differences between your personal credit score and your business credit score

Unlike a personal credit score, which only details loans and credit accounts, a business credit score covers finances, subsidiaries, ownership information, risk scores, and everything else related to the company's financial status.

It's helpful to know how your personal credit score and business credit score differ, and how they are connected in some ways.

Accessibility

A free copy of your personal credit report is available to you at any time. If you want to access your business credit score, you'll need to pay a reporting or processing fee to a credit reference agency.

The credit score of your business is public information, so anyone can access it if they pay a fee. As soon as you register your business, your score becomes active.

Privacy level

Personal credit scores are private, but business credit scores are not. Prior to working with you, business partners, vendors, credit providers, or stakeholders may review and evaluate your credit score.

Differentiation in scores

Regardless of which credit bureau you use, your personal credit score is calculated using standard algorithms. There is no standardised method for calculating company credit scores, so your business credit score will fluctuate between reporting agencies.

Your personal credit score can affect your business credit score

Your personal and business credit scores are typically considered separate and do not affect each other. A high personal credit score will not improve your business credit score, and a low business credit score will not lower your personal credit score.

The lender will likely use your personal credit score to make an informed decision since new businesses often do not have a meaningful history of loans and repayments. How much your personal credit influences your business credit depends directly on the type of business you own.

Sole traders
Your personal credit history will matter just as much as your business's credit history (i.e., both will be considered equally important). Protecting and improving your personal credit score is imperative.

Partnerships
Partnerships are treated similarly to sole proprietorships. Prior to receiving business financing, both your personal credit records and those of your partners are checked. Your partner's poor credit may prevent you from qualifying for a business loan even if your company's credit score is excellent.

Limited company
Business credit scores are unique to businesses. The business's partners and directors may still be checked on their personal credit records, however. A score represents the risk that you pose to your financial security or non-payment. You might also be able to qualify for a larger credit line based on this factor.

The way your personal credit score affects your business credit score depends on the type of business you manage and the situation.

How to improve your business credit score in 14 easy steps

The most effective way to increase your credit score quickly isn't simple or straightforward. A long-term financial plan is crucial. In order to build a strong credit score, you should collect robust information, follow financial management best practices, and monitor your credit score regularly.

Even though these things take time, they aren't difficult. Build these habits into your normal finance routines and systems so that they become part of your daily routines. Your credit score will rise over time.

Here are our top tips to help you start building a favourable business credit rating:

  1. Consider signing up for alerts that notify you when your company's credit record changes or is searched. Get immediate support when a problem arises.

  2. Vendors, suppliers, and customers can all affect your business credit score. Monitor their scores as well to ensure their actions do not affect your credit record.

  3. Make sure you check your credit score regularly (such as once a month or quarter) to be aware of any changes.

  4. Make sure your cash flow is in order. Your credit score may decrease if you run out of money and miss payments. Consider changing your invoice payment terms and using online accounting tools to stay on top of your receivables. Consider setting limits on how much money you can spend and how low you'll allow your account to go. Consult with your accountant or financial advisor to determine what would be appropriate for your business.

  5. To improve your credit score, ask your business partners and suppliers to share payment history data with CRAs. The more timely payments you can demonstrate, the better.

  6. When possible, pay on time or early. Payment terms are a form of credit, so failure to make payments on time can affect your credit rating. When you pay your bills on time, you will improve your credit score and demonstrate to creditors that your business has a healthy cash flow.

  7. You may want to consider a business credit card. Small businesses can benefit greatly from business credit cards. Travel and expense management rewards are also included. Your credit score will improve if you pay credit card bills on time and if you have a reliable cash flow.

  8. Make sure you keep an eye on your credit utilisation ratio. Lenders like to see that you responsibly use your credit line, even though it may seem counterintuitive. Your credit limit should not exceed 30% of your total available credit.

  9. Maintain careful financial management. You can use your personal financial data instead of your company's financial data when you are just starting out or have a small business.

  10. If a County Court Judgement occurs, pay it on time as soon as possible.

  11. Make sure your company's accounts are filed by the deadline. Financial problems can be accidentally indicated by late filing.

  12. Get started with a short-term, low-level loan you can pay back immediately. The monthly office supply order can be financed on credit or paid in instalments for office furniture. Credit agencies will take into account a pattern of consistent repayment of debt as an indication of future borrowing behavior if you consistently repay debt in full and on time.

  13. Make sure your business information is up-to-date. Whenever your business location or status changes, notify your customers, suppliers, and CRAs.

  14. Limit the number of credit applications you make at a time. Having too many applications in a short period may result in a credit search being performed on your business, which will appear on your credit report. As a result, it may appear that you are having difficulty obtaining financing.

Improve your business credit score gradually by focusing on the little things. If your business has plenty of capital to work with, a business credit card may not seem necessary, but it can improve your business credit quickly and sustainably.

You can choose a few of these points to prioritize in the short-term, and in the long-term, make progress on each. Your business credit score will improve over time.

Final thoughts

Keeping track of your business credit score is crucial to determining how much financial risk your business carries. You will be able to secure critical resources such as business loans, insurance and lines of credit if you build a positive business credit score.

If you would like more information on improving your business credit score and accessing funding for your business, contact Zyla Accountants today.

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