Your credit score serves as a reflection of your company’s financial health. As a new company, establishing a good credit score can be challenging, but there are several steps you can take to ensure your business achieves as high a score as possible.
In this blog, we’ll cover what a good credit score looks like, why it is important to your business, and the steps you can take to improve it. Let’s get started.
What is a Business Credit Score?
Similarly, to a personal credit score, a business credit score is based on financial history. Lenders use it as a tool to determine whether or not your company qualifies for credit.
The score typically ranges from 0 up to as high as 1000. The higher your score is, the less risk you pose to lenders and the more likely you are to secure credit. You should aim to score as close to the top end of the scale as possible to boost your creditworthiness.
Why Is Your Credit Score Important as a Business?
If you are opening a business bank account, applying for a business loan, or arranging a mobile phone contract – your credit score plays a significant role in whether your application will be approved. Additionally, your credit score will impact the rates and terms lenders and service providers offer you.
In other words, a good credit score will get you better deals on financial products, save your business money and build your reputation as a great company.
Whereas a poor credit score could result in extremely high-interest rates on any finance you are offered, or it could mean your company struggles to access finance at all.
How Can I Improve My Company Credit Score?
Without trading history behind you, establishing a good credit score as a new company takes time, but there are steps you can take to help speed up the process and ensure a good credit reputation. Let’s take a look at them.
Know your credit score
The first place to start is to actually determine what your current business credit score is and whether or not it needs improving.
As previously mentioned, the closer your score is to the top end of the scoring scale, the less risk is involved for lenders and the better your chances are of securing finance.
As an example, here are the estimated credit score categories according to the credit referencing agency Experian:
|Credit score range||Experian|
|Below average||0 – 549|
|Average||550 – 624|
|Good||625 – 699|
|Very good||700 – 799|
|Excellent||800 – 1000|
If your score is below average, it would be considered as carrying high risk to lenders and you should take action to improve it.
However, it’s important to note that your business doesn’t have one single credit score. Each credit referencing agency uses its own criteria for assessing your score, so it will likely vary depending on which agency you go to for your credit report.
There are three main credit referencing agencies in the UK; Experian, Equifax and TransUnion. You can find out your business credit score online for free by visiting their websites and submitting some details about your business. For a small fee, you can also subscribe to view your monthly credit report which helps monitor your score on a more regular basis.
Open up a business bank account
One of your first priorities as a new company should be to open up a dedicated business bank account. Although you are not legally obliged to do so, there are strict standards for recording and reporting the financial activity of your business and you will not be able to build up a company rating without one.
It is possible to get a business bank account if you have no credit history, or even if you have a bad credit score. Some banks, such as Natwest, Royal Bank of Scotland and Tide, offer business accounts with no credit checks, designed to help companies manage their finances regardless of their credit rating.
Keeping your personal finances separate from your business is hugely important when it comes to assessing your company credit score and helps to provide a clearer picture of your financial well-being.
Not only this, but banks can offer you specialist accounts, tailored to your business needs with additional features designed to make running your business more straightforward. The majority of banks will refuse to offer you a loan or line of credit without a business account. Making use of credit and overdrafts can also be useful in building up a good score for your business.
Limit credit applications
Building a good credit score takes time which can often be frustrating for new businesses eager to obtain finance. However, if you do apply for credit and fail it’s a good idea to refrain from reapplying too soon afterwards.
Repeatedly applying for credit and being rejected can give the impression that your business is financially unstable or not creditworthy. This can harm your business’s reputation and make it harder to secure credit in the future.
Always file on time
Ensuring you submit your accounts to Companies House and file tax and VAT returns before the deadline, can have a significantly positive impact on your credit score.
Conversely, filing late can suggest to lenders that you’re struggling with your finances.
You should also be sure to thoroughly check your accounts and returns for any errors or have them audited before sending them off to provide peace of mind, as mistakes can cost you when it comes to your credit score.
Pay bills on time
As well as filing promptly, it’s essential to also ensure you are paying your bills and invoices on time, as well as keeping on top of any credit repayments.
Your credit score will be negatively affected by any late bills or missed repayments, this includes late payments on phone contracts and utilities. And negative information like this can stay on your business’s credit report for several years, making the process of building a good credit reputation even harder.
If you anticipate being unable to meet a bill’s deadline, it might be a good idea to utilise financing to pay for it, provided you can secure credit. This approach could help you evade late fees and prevent any negative impact on your credit score.
Keep information up-to-date
Life as a business owner can be hectic, but keeping organised and up to date with admin can seriously pay off.
Be sure to keep Companies House, as well as your customers and suppliers, informed of any changes in your business such as contact details or location, as soon as possible. Any conflicting information can look bad to lenders and even the smallest mishap can weaken your credit score.
If you have any accounts no longer in use, such as ones you’ve perhaps opened for business loans or credit cards, make sure to close these. Your business credit score could be lowered if it appears that you have an abundance of available credit across numerous accounts.
A good rule to have is to schedule a quarterly ‘spring clean’ to ensure records are up to date and administration is taken care of.
Improve your personal credit score
Finally, directors’ credit scores can also affect the health of a business, particularly as a startup. Without a financial history to go off, some lenders may want to look at your personal credit score to gauge your risk factor. So check your own credit score, as well as your fellow directors’, on a regular basis and take steps to improve them if necessary.
Unfortunately, building a good credit score as a new business is not an overnight process. But starting things off the right way and incorporating good habits from the very beginning of your business will ultimately help you build a good credit score as quickly as possible. If you do experience a bad score, don’t worry – there are always steps you can take to repair this. It’s important to be patient and consistent with your processes.
Author: Graeme Donnelly, Founder & CEO of 1st Formations.
Graeme is passionate about business and in particular – new start business. He has been at the forefront of developing new and innovative business products for startups and SMEs for the last 18 years, in his role as CEO of Blue Square Virtual Offices and 1st Formations. In his spare time, Graeme is a keen cyclist, Instagrammer and dog owner.