No matter your business, there will be times when you need to borrow money. It could be something as trivial as dipping into your overdraft, or a multi-million pound loan. Whether large or small, the terms of your credit line will be overwhelmingly determined by one thing – your company’s credit rating.
While distinct from a personal credit rating (unless you’re a sole trader), how you go about managing your company’s financial reputation is very similar to how you would handle your personal rating. It’s all about keeping things above-board, transparent, and well managed.
1.Knowing is half the battle
The first step in effectively managing your company’s credit rating is rather obvious – you need to check your credit report.
These reports are pieced together from hundreds of disparate sources and can go back up to 15 years, so you may find your report contains information on past financial dealings you’ve completely forgotten about, or didn’t even know about in the first place.
The way credit reports are assembled can also lead to mistakes. For individuals this could be fraudulent activity such as identity theft, and similar errors can crop up for corporate reports.
If your company or trading name is similar to a dissolved company you may find debts being erroneously attributed to you. Getting these wiped away can instantly lift your credit rating, and can be the work of just a few minutes.
2.File early, file well
Companies House is a treasure trove of information for ratings agencies, and the majority of the information used to determine your credit rating will be gleaned from the Annual Accounts you file there every year.
Companies House filings are a legal obligation, but that doesn’t mean you can’t use them to bump up your rating a few points if you’re smart about it.
If you’ve had a particularly good year’s trading (one that might work in your favour when applying for a big loan, for example), you should consider filing full accounts with Companies House, rather than the minimum required Abbreviated Accounts. To add an extra sheen to your returns, consider employing a good accountant to audit your filings.
The extra information will be sucked into credit checking databases, and the fact that you’ve gone above and beyond in your reporting duties will not go unnoticed.
3.The market hates uncertainty
A lender’s worst nightmare is that a business suddenly becomes unable to make repayments on their borrowing so steady, recurring income is your friend when applying for credit.
A small marketing agency which relies on one client for the majority of their income might be considered a risk by a lender. If the contract isn’t renewed it could very well be curtains for the agency and a mess of bad debt for the lender.
Meanwhile a company that offers their product on a monthly subscription with a steadily growing subscriber base would be seen as a safe bet – the risk is spread across thousands or hundreds of thousands of customers and income can be forecast accurately months in advance.
If your business runs on a subscription basis it’ll help your chances from the get-go, but if your income is less predictable a bit of risk mitigation will go a long way. Favour long-term contracts with lengthy notice periods and staggered payment plans so you’re never too far away from the next invoice arriving.
4.The cash must flow
A creditworthy business model is a great foundation for a gold-plated credit rating, but it won’t be worth the paper your business plan is printed on if you can’t collect payments reliably.
Good cashflow management is the beating heart of any successful business, and a vital part of any credit application.
Collecting regular monthly payments? Embrace Direct Debits to reduce the paperwork involved in receiving money and will get the funds in your account quicker. Use software that gives you real time visibility of your cash position so you know if you can make payments, or will have to delay.
5.Credit control like a boss
Be firm with your payment terms. Some unscrupulous large businesses love to bully small suppliers with 90 day (or longer) terms – essentially leaning on tiny firms as providers of interest-free credit. Don’t let it happen to you. Insist on 30 day terms, and have strict late payment clauses built into every contract.
Make sure your accounts department have a cast-iron credit control process in place to collect every last penny you’re owed.
There are many obvious business benefits to having solid cashflow management, but it’ll help your credit rating too. By showing lenders you have a firm grasp of your own money, you can more easily persuade them to lend you theirs.
6.Do unto others
As well as flowing into your business, cash will also flow out, as you pay suppliers who in turn allow you to sell to your customers.
Not meeting your contractual payment terms is obviously bad for the businesses buying from you, but any enforcement action taken against you will also show up to ding your credit rating further down the line.
There will always be the odd disaster when you can’t settle a big invoice on time (especially in the early days) but make sure you are up-front about the problem and reach a happy resolution with your supplier, or that missed payment may come back to haunt you.
7.Know who you’re dealing with
If you operate in a regulated industry you’ll probably find a certain amount of due diligence is legally required of you (to comply with the Money Laundering Regulations and the Proceeds of Crime Act, for example), but even if it’s not a legal necessity a certain amount of ‘getting to know you’ can help minimise the risk of a customer failing to pay or, even worse, ripping you off.
Basic checks like making sure you have the correct contact details are a must, and if you’re entering into high-value contracts you may even want to give your prospective customer’s credit rating a peek.
8.Don’t be shy
The credit report creation process involves the sifting, analysis and parsing of thousands of datasets, and if you’ve got nothing to hide it makes sense to do everything you can to make that process easier for ratings agencies.
Keep your company structure simple (do you really need that holding company in the Caymen Islands?) make your registered address obvious, and don’t try to hide behind registered agents or identity protection services.
Embrace openness, and offer up all the information needed to create a fully-formed credit report. Is it really worth hiding your trading address if it means you can’t get a company credit card?
9.Be prepared if things get personal
If you absolutely must keep certain information about your company confidential then be prepared to receive the latex gloves treatment yourself.
If a credit agency can’t find enough information on your firm to cobble together an accurate credit score they’ll start looking at the personal finances of the company directors.
If you’re driving around in a brand new Ferrari it’s a pretty good indicator business is booming. If you recently defaulted on your mortgage, perhaps trade isn’t so rosy.
Having your personal finances in good order can help even if you have no intention of hiding company information, though. A string of overdue Self Assessments will be a red flag against your company if a credit agency or potential supplier digs deep enough.
Think of your personal finances as the credit safety net under your company dealings. They should support the argument that you’re creditworthy, not introduce unnecessary doubt.
10.Don’t get addicted to credit
Using and properly managing your credit lines is essential in building up a good credit score, but it should only be a part of your cashflow management. Use it to supplement cash transactions, get you through fallow periods, or make big purchases.
If you’re using credit for absolutely everything it’s time to re-think your strategy. Sure, you might just be maxing out your American Express card to rack up those air miles, but on your credit report it could look like you have severe liquidity problems.