Discover the world of UK business credit scores and what you can do to improve your business’s ability to secure financing and business loans.
Defining A Business Credit Score
A business credit score is a number that provides companies with an idea of your business’s financial health. Typically, companies use this score to determine the risk involved with providing your business with funding. If you have a bad credit score, you may struggle to get funding. If you have a good credit score, you’ll have more opportunities to borrow money and will likely get better rates too.
Business credit scores are represented by a number out of 100. The higher that number is, the better your score. Below are the number ranges that identify a bad score (i.e. high risk) to a good score (i.e. low risk).
- High risk: 0-49
- Medium risk: 50-79
- Low risk: 80-100
Factors That Influence Business Credit Scores
Lenders and agencies will look at a variety of factors to calculate your credit score. These can include both financial factors and behavioural factors.
Since this is largely a financial aspect of your business, it’s probably no surprise that financial factors are involved in calculating your business credit score. After all, if your business is in a bad financial position, lenders should know about the risks of giving you money and the lower chances of getting that money back.
Some of the financial factors that are involved in calculating a business’ credit score include:
- Your business’s level of debt.
- Your business’s payment history.
- The time it takes to collect receivables.
Not everything can come down to simply finances alone. The way that your business behaves can also affect your business credit rating and whether or not companies will want to interact with you in any way.
A few behavioural factors that are involved in calculating your business’ credit score include:
- The amount of credit applications you’ve made.
- Ongoing or previous legal issues.
- Any tax problems or regulatory problems.
Ways To Improve Your Credit Score
One of the best things that you can do for your business is improve its credit rating. It’ll help you to get financing if and when you need it, and will also help you to maintain good financial health and behaviour.
Below are a variety of things that you should do to build a good business credit score.
Separate your finances
A lot of business owners choose to use the same bank account for their personal finances and their business finances. While this can be helpful in some situations, it can also have a negative impact on your business credit score.
For example, if your business is registered as a limited company, lenders may check your personal credit score as one of the ways to assess the risk of lending you money. A credit reporting agency may also use personal credit scores to determine creditworthiness.
So, if you have a bad personal credit score and you have not separated your finances, you may be denied the loan you’re aiming to get or you’ll get a much smaller loan than you need.
Make payments on time
If your business has a history of constantly making late payments, you’re going to appear less creditworthy and will struggle to get a business loan.
By paying bills on time, you not only stay on track with all your finances, but you can also improve your company credit score and show lenders that you’re reliable when it comes to paying what you owe.
By making timely payments, you can significantly reduce your chance of getting a bad business credit rating (which can be a very difficult thing to fix). And if your suppliers report your payment history to credit reference agencies, this will help you even further.
If you’re really not good at remembering to make payments on time, you can set up automated payments for your business or set reminders on your different devices to let you know when they’re due.
Keep your business information up to date
This one is quite simple, yet still important. If your business information changes, you will need to update it with HMRC and any suppliers as soon as possible.
By keeping your business information up to date, you’ll also be keeping your business’ credit information up to date, meaning that any reporting will still be accurate according to your business location, business finance, and any other finer details.
Check if you’re eligible for finance before applying
If you are going to be applying for financing, you should check that you’re eligible first. There are a variety of lenders that allow you to do this before you apply for a business loan in order to protect your credit score.
When you do actually apply for financing, it’s quite possible that it will also cause a credit search on your business. If your application for financing is turned down, this may have a negative impact on your business credit score.
By checking that you’re eligible for financing before you officially apply, you can avoid a hard credit check on your business and can make a more informed decision about the best option for you.
If the company you want to request financing from doesn’t have an eligibility checker, you can also ask for a quote and make the assessment yourself and then make a decision based on the information you receive.
Reduce your number of credit applications
When you make multiple applications for business credit in a short amount of time, you can really do damage to your credit rating.
For a start, every time you submit a credit application, it’s added to your business credit report. And if it’s unsuccessful, it will still be added.
Secondly, simply applying for credit will cause your business credit score to drop a little bit. So, doing this multiple times in a row will cause it to drop with every new application.
And lastly, applying for credit multiple times in a row will cause credit agencies to assume that your business is struggling financially or struggling to secure finance. This will not look good for your business and will make it even harder to get a loan.
While most businesses do need financial help to grow, it’s not a good look when a business constantly needs credit in order to operate. So, instead of applying whenever you want to, it’s important to assess your situation carefully and only apply when you really need credit.
Regularly check your business credit score
When you regularly check your business’ credit score, you’ll be in a better position to catch issues as well as take advantage of good situations (further improving your score). If there is an issue or an error on your credit record, you can start working towards fixing it before you need to apply for financing.
A misconception that some people have is that checking your credit score will negatively impact it. And while hard credit checks will hurt your credit score, soft credit checks will not.
Several companies will be able to conduct a soft credit check on your business – avoiding any negative effects on your credit score and helping you to get a better idea of your business’s current position in the world of credit.
Regularly check the credit scores of those you work with
It’s important to check the credit scores of the companies that you work with too. If any of your partners, suppliers, or clients start to face financial issues, it can impact you negatively too. If they miss payments for example.
By identifying these issues with some of the companies that you work with, you can plan ahead, speak to the companies, and figure out ways to avoid the negative impact that it could have on your business.
Keep an eye on your credit utilisation ratio
Your credit utilisation ratio (CUR) is the amount of credit you’ve used in comparison to the amount that you were offered. This is usually calculated as a percentage. So, if you’ve used £100 out of a £1000 loan, your credit utilisation ratio would be 10%.
When you have a higher CUR, it doesn’t look good for your business, so it’s always best to use as little as possible. A general rule that businesses go by is that you should use less than 30% of the funds that are available to you.
With this in mind, it’s a good idea to apply for more credit than you need, as this will help you to keep your CUR under (or as close to) 30% as possible. Even if you’ve already received a business credit card, you can request that your limit be increased to keep your CUR low. But just be aware that this request won’t always be accepted.
Avoid closing accounts
Unlike closing a bank account, closing a credit account can have a negative impact on your business credit score. This is because, when you remove a credit account from your credit reports, it will also remove your payment behaviour history for that account.
Even if you have an old credit account, that payment history can help you to build a good business credit score. This is mainly due to two reasons:
- That old credit account contributes to your credit availability and can therefore improve your credit utilisation ratio. By closing the account, you’re likely increasing your CUR.
- As your credit line gets older, you improve your creditworthiness. So, even if you no longer use an old credit account, it can play a valuable role in helping you secure credit later on.
How To Improve a Bad Credit Score
If you already have a bad credit score, it’s going to be quite difficult to improve and it will likely take a lot of time. So, you will need to be patient.
Some of the more immediate steps that you can take to start improving a bad credit score include:
- Identify errors in your credit report – This will help you to figure out if anything has gone wrong, allowing you to either fix the errors yourself or follow the dispute process that credit reporting agencies have in place.
- Correct bad behaviour – This comes down to fixing things like constantly making late payments, utilising too much credit, etc.
- Update your business information – When your business information is up to date, it won’t look like you’re hiding something. It’ll also help with reporting accuracy.
- Establish new lines of credit – If you’re able to, establishing new lines of credit will help you balance out the bad lines of credit. Just make sure to continue to pay all accounts on time whilst you pay off the loans that you’re behind on.
How does a business build its credit score?
There are a number of ways that you can build a business credit score. However, one of the best things that you can do is pay your bills on time. This will help you to avoid a high credit utilisation ratio, as well as show lenders that your business is reliable and consistent with paying the bills.
How long does it take for a business credit score to go up?
Every business is different, and that means estimates for increasing credit scores will vary. In general, you can expect it to take at least two years to build your business’ credit history. But, there will be exceptions where you’ll be able to do it in as little as one year.
What is an acceptable business credit score?
There are three tiers of business credit scores: low risk, medium risk, and high risk. Usually, you’ll want to be in the low-risk tier to have the best chance of having your credit application accepted. This is a score of anywhere from 80 to 100.