How low can you go?

Julian Smith
Julian Smith

Funding expert, Julian Smith takes a look at how to improve your business’ credit score.

It seems that SMEs are becoming less reliant on traditional sources of credit. According to its latest quarterly analysis of finance for SMEs (Q2 ‘14), BDRC Continental observed that only 30% of businesses were using traditional finance – be it an overdraft, loan, or credit card – compared to 36% in the same quarter two years ago. Interestingly, only 5% regarded themselves as would-be seekers of credit (down from about 10% in 2012).

Being able to access credit is a good sign that other relevant participant in the market think that your company is in good health. But how do they make these judgments, and what influence do you have over their decisions?

In the UK, there is a heavy reliance on credit reference agencies (the big five are CreditSafe, Dun & Bradstreet, Equifax, Experian and Graydon – collectively known as the CRAs). They gather information from public and non-public sources to build an aggregate picture of your business’s financial health from the point of view of a potential lender. The information they use is generally historic; what financial information has been filed with Companies House, whether or not there are any County Court Judgments against your company, and what your payment history has been to suppliers.

The system has a negative bias towards companies for whom there is not much information available, hitting start-ups particularly hard. For smaller companies, the business credit score will be closely related to the score of the individual directors, and finance providers will often seek a personal guarantee, so not only do you have to be aware of your business credit score, but also your personal score (it just happens that many of the CRAs also provide personal credit scoring services).

Why is a negative credit score important? Well, even if you are not looking for a bank loan or overdraft approval, it could affect the way your suppliers treat you, and if they start being more demanding on payment terms, it could affect your cashflow profile.

So what can you do to improve your credit score?:

1. Understand what’s in your current score

You have the right to know what information the CRAs are using. If you discover errors or inaccuracies, you can do something about it by providing new information or filling historical gaps.

2. Good financial housekeeping

Think about the way you manage your business finances – the balance of debt and equity in the business; management of your debtors (to avoid having a knock-on effect on creditor payments); having a healthy working capital balance (ratio of current assets to current liabilities); and paying suppliers on time. Credit scoring tends to be trend based, so over time, with improving behavior and metrics, you can improve your credit score.

3. Improving understanding

Sometimes, with finance providers, it’s a question of educating them about the qualities of your business so they have an understanding of the financial characteristics, and are therefore less likely to penalise you unnecessarily.

Although it may seem like a dark art, credit scoring is a subjective exercise calculated by people and machines with imperfect information. You, as a business owner, have the potential to influence the public view of your credit score. Unfortunately, very few business owners actually take the time to do so.

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