Understand & improve your business credit health

Business credit scores provide a snapshot out of 100 of the financial health and creditworthiness of an organisation - calculated by measuring payment and default history, levels of debt, legal problems, riskiness of the customer base and even the type of industry the company operates in. Banks, major suppliers, and commercial lenders will check a business’s credit score to understand the financial position of the company and its level of risk. Typically, higher scores increase an organisation’s borrowing options and reduce the rates they pay. Lower scores reduce the business’s loan options and increase the costs they pay.

Every business in the UK, from SME’s to sole traders has a credit score – but according to the British Business Bank, two thirds of UK business owners have never checked their score and 90% have no idea what goes into it. They may only become aware of their credit score when they apply for a business loan or other form of credit, and then they may be disappointed with the results. It is important to know your business’s credit rating before applying for any type of borrowing. You can do this without paying a fee by obtaining your free business credit health check now by registering with your business with Swoop.

Everyone knows their personal credit score can affect their ability to secure a mortgage, lease a car, secure lending, open a mobile phone account, or even buy electricity and gas on credit. Business credit scores carry the same type of weight. They can decide if a business can borrow, if it can obtain supplier credit, if it can lease premises, even if it can secure a major contract. A business’s credit score is central to its success. Good scores may help it flourish, whilst bad scores may see it struggle.

Banks and credit rating agencies model their scores on a business’s behavioural and financial situation. Behavioural factors will include things like does the company pay its bills on time, does it have past or ongoing legal issues, and are there any tax or regulatory problems. Financial factors will include the company’s level of debt compared to assets, any late payment history, the quality of its customer base and how long it takes to collect receivables. Scores may be shown on a numerical scale ranging from 0 to 100, (with 0 being very bad credit and 100 being excellent), or across an alphabetical scale, (with E being very bad credit and A+++ being excellent).

They are primarily used by banks and commercial lenders to support the provision of loans. The lenders’ willingness to supply credit and the rates they charge for those funds will be largely determined by a company’s credit score. Score high and you may see an array of borrowing options at very attractive rates. Score low and you may see few or no funding offers and high costs for whatever credit you can find. Additionally, major suppliers, landlords, utility providers and even large customers may also refer to a company’s credit score before choosing to do business with them.

Business credit scores are measured on a numerical scale, (0 to 100), or on an alphabetical scale, (E to A+++). The latter closely mirrors the economic scoring systems used by global rating agencies such as Moody’s and S&P. A ‘good’ score, which means the business is a good to excellent financial risk, would typically be above 75 on the numerical scale and from A to A+++ on the alphabetical scale.

Banks and rating agencies base their business credit scores on available information – and the more information there is and the more positive it is, the better it is. Having low or no credit history, minimal operating data and hidden activities will always have a negative impact on your business’s score. Follow these steps to build a positive result:

• Put your business on the map - Don’t be invisible. Operate an informative website, register with the local chamber of commerce, open a business bank account, publish a dedicated business phone number, join guilds, associations and societies connected to your area of operation.
• Establish credit lines - Open credit accounts with suppliers you do business with – and always pay them when their bills fall due.
• Get a business credit card - It’s never too soon to start building a positive credit history in the name of your business. Apply for a company credit card and only use it for legitimate business purposes. Do not go over your limit and always pay the card on time.
• Keep your credit in control - Don’t apply for lots of credit – especially if your business is young. Ask for credit only when you need it. If it appears that you have too much credit, it can hurt your score.
• Keep business and personal accounts separate - Banks and lenders are not impressed by businesses that blur the line between personal and business income and expenditures. Many sole traders are guilty of this. Keep a distinct separation between your business and your personal finances. Lenders like this and as a bonus, it will make it easier to calculate your taxes.

A damaged credit rating can damage your business so it is essential to repair the flaws in your business’s credit score as soon as possible. Unfortunately, as with personal credit scores, the most significant healer of a bad business credit score is time – as negative events fade into history, so they have less impact on your score. However, even if complete repair is a long-term activity, there are still actions you can take today to speed up the process:

• Review your business credit report for errors - Misinformation on your report can have a bad effect on your score. Obtain a copy of your business credit profile and review the contents. If you see negative items that you feel are incorrect, contact the rating agency and the organisation that has posted the negative item to have it removed and a correction made to your report.
• Correct any bad behaviour - If your organisation is habitually late paying suppliers and has a casual relationship with due dates on loan payments, those behavioural aspects will have a negative impact on your credit score. Change the way your business behaves. Pay suppliers on time and honour fixed payment dates.
• Establish new lines of credit - As soon as it becomes a possibility, open a new business credit card account. Seek new supplier accounts to balance those that have fallen into disarray. Ensure new accounts are paid on time and pay off arrears on loans or past due debts to existing suppliers.
• Update publicly visible information - Moved premises and didn’t tell anyone? Changed your phone number and never listed it? Out of date public information can make a business look like it is hiding something. Update your website, signage, listings, and registrations.

More importantly, what score do you need to obtain an economical business loan? Such loans typically enjoy low interest rates and fees. However, they are usually only available for good to excellent risk applicants. This means companies with a credit score over 75, or between A and A+++ on the alphabetical scale. Note that many business loans are still available for organisations with lower scores, (or that have even been rejected on previous loan applications), but they may come at a higher cost to reflect the greater risk involved.

Essentially, business scores and personal scores do the same thing – they reveal the financial health of the borrower. However, anyone trying to directly compare a personal credit score to a business credit score will find themselves frustrated. Unlike the personal scoring system, where a standard risk value is assessed on individuals, business credit scores are assessed on companies by a range of credit agencies, banks, and other lenders. Each assessor will have its own calculation models and their scores are not so freely available for review. Sole traders may also find that their personal credit score is entwined with their business credit score to further complicate the subject. Additionally, while there are government rules to protect individuals from false credit reporting, there are no such rules for companies. This means UK business should regularly check their report is free of errors. Failure to do so could see their credit score mistakenly reduced.

Yes and no. When your business applies for credit, it does so in the name of the company and the application will generate a business credit score that is independent of your personal score. However, many lenders also wish to see the credit worthiness of the company principal and for that, they check your personal credit score. If that score is too low, it could adversely impact your business loan application. Additionally, if you are providing a personal guarantee, or supplying collateral in your name, (such as your home), the lender will certainly review your personal credit report. Lastly, many sole traders merge their business operations with their personal finances. To uncouple this unwelcome combination, lenders will usually seek both business and personal credit scores.

Some organisations charge a fee for providing your business credit score. However, you can check your business' credit health without for free by registering with Swoop. See your business credit score the way lender’s see it. Always free and up to date.