Business Credit Scores – what are they?
Many people believe that only individuals will have assigned credit scores, but this simply isn’t true. Businesses too will have assigned credit scores that will be used to assess and determine their credit-worthiness as a company. Credit-worthiness is simply a more complex term to describe relative ability to pay back loans (credit).
Credit scores for businesses are incredibly important – and maintaining a good score is crucial for meeting the requirements to qualify for top-tier loans, business credit cards, and improving the cash-flow potential of your business. Increased cash flow is a wonderful vector for one thing that most businesses are chasing – growth.
Credit scores are assigned and updated by a core group of credit agencies – of which you are free to choose your favourite. They are constantly updated, using incredibly complex rating systems that we won’t even begin to try and dissect.
The credit score assigned to your business is incredibly easy to understand, and all it will take is a quick check with your chosen credit agency to find out what everything means. Included below is an example from Experian (one of the largest credit agencies in the UK) on how to read your credit score how a potential lender would.
|1||Imminently Failing Company|
|2 – 15||Max Risk|
|16 -25||High Risk|
|26-50||Above Average Risk|
|51-80||Below Average Risk|
|91-100||Very Low Risk|
Personal Credit Scores – Boosters, Busters, Myths
|Credit Boosters||Credit Busters||Myths|
|Borrowing what you can afford – and if you use credit, ensure you can comfortably meet the repayments.||Frequently setting up new accounts.||Previous occupants of your home address do not affect your credit score.|
|Utilising direct debits for regular payments.||Constantly being at your credit limit.||Friends and family that you live with do not affect your credit score, unless you are directly financially linked.|
|Pay off any credit if possible.||Frequently applying for credit.||Incredibly distant credit history does not affect your credit score. 6 years is the usual credit window that companies will look at.|
|Try to focus on maintaining older, well-managed accounts.||Missing payments. This is a big one.||Checking your credit score too often does not affect your credit score.|
|Register to vote at your current address.||Borrowing more than you can afford.||Comparing credit scores and searching for credit cards does not affect your credit score.|
|Check your credit score for accuracy – and pull up any mistakes.|
|Protect yourself against fraud.|
For whatever reason, there seem to be a huge amount of urban-myths surrounding personal credit scores. It is hard to believe the amount of misinformation surrounding this topic that is published online.
If you are looking to improve your business credit-score – a great place to start is your own personal credit rating. This isn’t necessarily because it will have a tangible effect on your business credit score, but more-so because it teaches credit literacy – as-well as being the most logical place to start. It is an incredibly large task for many to suddenly make the decision to improve their business credit score – it is far more sensible to learn and develop positive habits in your personal life that will then be easily transferable to your business life.
Business Credit Boosters – Ten Top Tips
- Analyse: Although credit reports are not always free, it is always worth taking the time to procure and analyse your report. This doesn’t have to be every month – just whenever you are able to. You may even be able to find mistakes or discrepancies.
- Avoid Paying Late: This is a no-brainer, and one of the things that will affect your score massively. If you habitually leave bills past due or regularly forget contractual payments, your credit score will take a dive. If you can manage to get in the habit of paying your bills on time you will likely see a significant improvement. If you struggle with organisation – try setting reminders on your phone, or even setting up direct-debits where possible.
- Build Relationships: If your business relies heavily on external contractors or suppliers, it is worthwhile to try and build up a solid credit account with them (as-well as personal). If you have any suppliers that you have worked with for a long time, or see yourself working with in the future – it is worthwhile to focus on these credit accounts. Developing a good working relationship allows for (somewhat) of preferential treatment, and you are more likely to be treated as a priority.
- Dispute: If there are any suspicious charges on your credit or debit card, or any information that seems to be wrong – enter into a dispute. Find where the fault lies and force the issue to be rectified.
- Reduce Ratio of Credit-Utilisation: The ratio of credit utilisation is the relationship between used credit and what is still available to be used. There is a variety of ways you can deal with this issue – try paying off your balances, changing your credit limit, or reducing your overall spending with credit cards.
- Early Credit Acquisition: Applying for and receiving credit well in advance before it is needed is a sure-fire way to boost your credit. Not only will it improve your business operations, but it will allow flexibility when dealing with short-term financial problems – avoiding any scenarios where potential missed payments would occur.
- Fewer Loans: Similarly to personal credit, it is unadvisable to take out multiple loans or credit cards unless absolutely necessary. Many credit lenders exhibit preferences for working with customers with less financial obligations rather than more. Not only this, but it is far easier to lose track of financial transactions if you are dealing with multiple credit cards or lenders than just one.
- Less is More: Try to avoid maxing out your business credit cards on unnecessary expenses. It may be tempting, but it will drive your credit score down. Always try to maintain a fair amount of leeway in your allowance.
- Reference: This is one of the lesser known ‘hacks’ to a better business credit score. It is possible to provide positive payment references from suppliers you work with – indicating you are a trustworthy business to work with.
- Solve any Lingering Issues: This is again, a bit of a no-brainer. If there are any unresolved debts or poor financial transaction behaviour – it is a good idea to dedicate some time to try and solve these. It’s boring, difficult, and incredibly frustrating – but ultimately worth it in the long run.
How to Immediately put yourself in the top 40% of businesses
If there is one statistic, fact, or piece of advice to take away from this article – let it be this.
Check. Your. Credit. Score.
It has already been covered and then some – but this is a final call to action. Dedicate some time of the working day to apply for a credit report and check your current score. There is simply no point to attempting to improve your score if you don’t even know what it is, or why it is that value.
A quote from Max Firth, the Managing Director of Experian’s business information services, seems like a fitting way to end this article. The information included below can be one of two things depending on your outlook – a damning statistic on financial illiteracy, or a call to action to do something about your business credit. The choice is yours.
“Around 61 per cent of businesses have never checked their own credit score…”Max Firth – Experian