What your business credit score means and how to improve it

Credit scores are like birth certificates: you know you have one, you know it’s important, but have you seen it recently? Probably not. In this article, we explain what goes into your business credit score and show you how to manage it effectively.

This article was produced in association with Experian.

Knowledge is power

The truth is: most people don’t know what their credit score means. This obliviousness isn’t limited to personal credit scores, either – small businesses are equally guilty. A ComRes survey for Experian in 2014 asked financial decision makers in UK SMEs about their credit situation. The results show that directors of small businesses were frequently unaware of what influences their credit rating, let alone how to improve it:

  • Only 13% could correctly identify all the key factors that influence the credit rating of a business.
  • Nearly three in five (59%) small firms had never checked their commercial credit score. And of those that had, over half (56%) hadn’t checked within the previous six months.

As we wrote about a few weeks ago, credit checking businesses is an essential element of maintaining good cash flow and credit control. If you’re credit-checking your customers, they’re probably credit-checking you. At the very least, it’s important to be aware of any errors or inaccuracies on your credit report. But there are other reasons too.

Why is a credit score important?

Banks check your business credit score when you apply for things like loans and credit cards. The score is a number generated by a Credit Reference Agency (CRA), indicating how reliable you’ve been with past repayments, and how likely you are to pay late (or not at all).

Lenders will set rates and terms based on this information to mitigate any risk, so it’s in your interest to maintain a good credit score to make it easy (and less expensive) to obtain credit when you need it. However, a strong credit score can also help in other ways – such as when competing for tenders or negotiating business contracts.

As a business, you want to make sure your score is as high as possible. But how?

Improve your credit score: there’s no ‘one weird trick’

Contrary to what those nefarious internet popups would have you believe, there’s no secret formula that will improve your credit rating overnight. A healthy credit score is made up of three key elements: robust information, sound financial management and regular monitoring.

To make it easy for you, we’ve pulled together 12 practical tips to help you manage your score effectively.

  1. Share information: with CRAs. Credit checking involves validating the information on your record, so the more data available on your business, the better.
  2. Stay up to date: inform customers, suppliers, Companies House, directories and CRAs of changes to location or business status. Out-of-date or inconsistent information will make your business appear unreliable.
  3. Collaborate with suppliers: ask them to provide feedback and share data on your payment records with CRAs.
  4. Watch your personal finances: for start-ups with little financial information available, data on their owners’ personal finances may be used as an indicator of creditworthiness.
  5. Pay promptly: pay invoices on time wherever possible. Payment terms are a form of credit, so failure to do so will damage your credit rating.
  6. File on time: always submit accounts and returns by the deadline. Late filing can indicate financial problems.
  7. Avoid County Court Judgments: and pay them on time should they occur. If it happens once, in a stable economy, and is paid promptly then this won’t necessarily lead to withdrawn credit.
  8. Limit credit applications: as this may lead to credit searches on your business, which are recorded on your credit record. Too many in a short period can suggest a business is struggling to secure funding, impacting your credit score. When enquiring about finance, ask for a quote instead.
  9. Check your own rating: obtaining access to your business’s credit report and checking your score each month can help you avoid unpleasant surprises.
  10. Keep tabs on your score: use online tools such as My Business Profile to monitor your credit position in real time and act on any changes that occur.
  11. Be alert: sign up for alerts when your company’s credit record changes or is searched, so you can act quickly to rectify problems.
  12. Don’t forget partners: monitor your customers’ and suppliers’ credit positions, so you can limit the damage to your business should one of them go into administration.

Following these steps won’t guarantee you a perfect credit score, but they will certainly help you avoid any nasty surprises.

This article was produced in association with Experian and appeared on SME Insider.

See what your business credit score says about you today with Experian My Business Profile.