An SME guide to business credit scores

16 July 2015 Kieron Johnson

When it comes to credit scoring, one thing is clear: most people aren’t clear about it. What they are clear about is the splitting headache they develop when they realise their credit score has seen better days – and business credit scores are no exception. Consider this guide a Panadol for the pain.

If your business has made an application for finance recently, your firm’s financials are being put through their paces more rigorously than popcorn in a microwave and you’re probably none the wiser. But when it comes to business finance, ignorance most definitely isn’t bliss.

Your business credit score is one way lenders, companies you do business with and those on your wish list size-up your company’s ability to repay what it owes. It also sets the tone for your firm’s payment terms.

We know it’s hot outside but, if you can just drag yourself away from the water cooler (not to mention the office gossip) for a minute or two, you’ll not only be wise to what your business credit report says about your company, but also how it affects its standing.

What’s the score?

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Ok, so we may have been a bit presumptuous in our intro (apologies for that).

After all, you may well be a walking encyclopedia on personal credit scoring. But, if you’re a business owner, you’ll also need to get to grips with another type of score that could have serious implications for your company: the business (or commercial) credit score.

Let’s face it, credit scoring is a pessimistic business. Business credit scores exist to do one thing and one thing only and that’s to predict the likelihood of late payment or, worse still, non-payment.

Like a personal credit score does for borrowers, a business credit score uses credit history to calculate a number – a business credit score – indicating a company’s risk.

Your business credit score is normally a number between 0 and 100. The higher your score, the less risky your business appears.

The five main commercial Credit Reference Agencies (CRAs) in the UK are:

  • CreditSafe.
  • Dun & Bradstreet.
  • Equifax.
  • Experian.
  • Graydon UK.

Ignorance isn’t bliss

According to a 2013 report by the Department for Business, Innovation & Skills (BIS), 69% of Small and Medium-Sized Enterprises (SMEs) have never checked their business and personal credit scores.

As we mentioned right out of the gate, there’s no such thing as blissful ignorance when it comes to your company’s financials.

If you’re in the market for expanding or improving your business and you want to take out a loan, your business credit score will affect how much a lender is willing to lend (if they’re willing to offer you a loan at all).

Although banks are still the main users of business credit scores, this info is important to anyone who extends credit or has to handle risk in a business relationship. This includes:

  • Credit issuers, such as credit card companies, insurance firms and leasing companies.
  • Non-financial firms, such as wholesalers, manufacturers and business service firms.

By accessing and understanding your business credit score, you can increase your firm’s chances of getting the nod for future finance applications.

Beyond that, there’s another couple of stand-out benefits of being in-the-know about your business credit score:

1.Indication of business stability (potential for negotiating preferred credit terms)

Lenders, suppliers and customers all have a vested interest in the financial health of your business. Your business credit score can ultimately determine how you appear to other firms and can be the reason why people choose to do business with you (or not, as the case may be).

This is something SMEs know all too well. In the BIS report we mentioned, some 88% of SMEs knew that business and personal credit scores produced by CRAs might be used by suppliers and financial institutions to decide whether to issue credit or trade with businesses.

2.Opportunity to update company data

Knowing you have a poor business credit score isn’t all bad news.

Having information means you can have influence, so one way of looking at it is that this newfound knowledge actually puts you firmly in the driving seat. So, get driving. If your business credit score isn’t up to much, what better time than now to improve it?

A picture is worth a thousand words

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Whether you’re a fledgling company in need of start-up funding or a growing company seeking funding for expansion, any finance application will inevitably mean your lender will try to build a picture of your personal and business circumstances.

To do this, a typical bank, for example, will use four data sources:

  • Details provided on your finance application.
  • Your account management (personal and business).
  • CRA information about you and your business.
  • Your relationship manager’s assessment of the overall health of your business.

Not all business is about business. Sometimes, it’s personal.

A solid personal credit score is critical for any new business. Before a business can claim a credit score in its own right, all eligibility assessments for borrowing are initially conducted on the basis of the credit history of:

  • The individual.
  • The business owners.
  • The directors.

CRAs hold the following credit profile information:

  • Payment history.
  • Total debt.
  • Credit type and duration.
  • Finance facility.
  • Recent finance applications.

Each lender you approach for business credit will allocate points for each piece of information collected and compute a total score. When your score hits a certain number (which varies between lenders), your application will likely get the go-ahead. Now, you’re in business.

Business credit score not quite hitting the mark?

Here’s some pointers for upping your score:

  • Make credit repayments on time and for the right amount (more if you can).
  • Ensure you have pride of place on the Electoral Register.
  • If you have limited company status, it’s preferable to file full rather than abbreviated accounts at Companies House.
  • Check that your account balance and approved overdraft limit can accommodate future payments, such as cheques, standing orders and direct debits.
  • Establish use of your business bank account over time to show your turnover (for example, don’t enter business receipts into your personal bank account).
  • When making finance enquiries, limit your initial enquiry to a quotation – at least until you’re 100% ready to apply for finance. This will leave your business credit score untouched.
  • On average, SMEs check their credit scores once a year. Take a long, hard look at your business credit report at least once a quarter, highlight any info that you think is wrong and be sure to have it corrected ASAP.

So, you’ve done a spot of DIY on your business credit score and all looks well. Here’s some further tips to keep it that way:

  • Try to avoid making multiple finance applications simultaneously over a short period. This will create a ‘footprint’ on your business credit record, which could spell bad news for your business credit rating.
  • Keep comfortably within your agreed credit and overdraft limits.
  • Avoid bankruptcy and other legal difficulties.

Understanding your business credit score doesn’t have to resemble an episode of Mastermind. A little attention goes a long way.

TL, DR: Very few businesses (17% of SMEs) take active steps to manage their credit score. Don’t let your company be among this headcount. Whether you’re on the hunt for finance or seeking out a new trade partner, your business credit score is all-important. Understanding the role your personal finances play and handling them responsibly is key to establishing a solid business credit score, particularly when your company is at the start-up or early growth stage.