When applying for funding of any kind, there are numerous factors a lender will look into before deciding whether to accept your business. One of these factors is your credit rating.
Credit ratings are crucial for your borrowing eligibility and the opportunities available. It is used to determine how risky you are to lend money, which will drive the success rates of your funding applications and force your hand when it comes to pursuing finance.
This blog explores business credit ratings, including how they are calculated, their impact and what you can do to improve yours.
- What is a credit rating?
- What is a good credit score?
- How does a credit rating affect my business’s eligibility for finance?
- How to improve a low credit rating
What is a credit rating?
A credit rating is a score between 0 and 999, which dictates how reliable your company is with credit. It is based on many factors: most prominently, your payment history and owed debt, followed by the length of your credit history, any new credit you undertake and the types of credit you utilise.
Although credit rating is often seen as an indicator of risk, it’s also used to predict future scenarios. Based on your rating, a lender will determine how likely it is your business will repay the funding they offer and what is the best deal for your criteria.
What is a good credit score?
The higher your credit rating, the more reliable lenders see you. Below, we’ve listed how different scores may be perceived:
- 0-550 (rating 1) = very poor
- 551-565 (rating 2) = poor
- 566-604 (rating 3) = fair
- 604-627 (rating 4) = good
- 628-710 (rating 5) = excellent
Anything over 710 is outstanding and very rare.
How does a credit rating affect my business’s eligibility for finance?
As we’ve already mentioned, many lenders will utilise company credit ratings to determine whether you are suitable for lending, including your risk level and the likelihood you will make money.
Most lenders won’t disclose the exact score they are looking for or where their cut-off point is. There will also be other factors that are considered, including the strength of your business plan and any security you can leverage.
Every lender is different, and their acceptance criteria will vary. However, your credit score will be the key to success for more risk-averse lenders, such as banks and traditional lenders. It might bear less weight for alternative lenders and investors.
Your credit rating also comes into consideration when accessing utilities, credit cards, mortgages or insurance for your business – so it’s wise to make it as high as possible.
It is also worth noting that your credit won’t just dictate whether your business is accepted or rejected for finance. It might also determine how much money you receive, the interest rate and terms.
How to improve a low credit rating
If your company credit score falls into a lower category than you would like, it is in your best interest to improve it. While there are options for businesses with low credit ratings, having a higher score will give you more opportunities that suit your goals.
We’ve listed our tips for improvement below.
Review your credit score regularly
The first place to start when improving your credit score is to understand where you are. There are many tools available to conduct credit checks, such as Experian.
As you begin to make changes, remember to regularly review your score to see if it’s moving in the right direction. This will help you keep on top of it and take the right action to improve it.
Keep up with credit payments
The easiest way to protect your credit rating is to ensure you keep up with your owed payments. If you miss a payment or fall into debt, it will have repercussions.
If your business has previously struggled with meeting repayments, aim to get into a better cycle and avoid continuing to fall behind on future payments. This will prevent your score from worsening and may even start to reverse some of the damage over time.
Add positive payments to your history
When trying to protect your credit rating, it may be tempting to avoid any instances of debt altogether. Instead, you should try to add positive payments to your history that show you are reliable.
Positive payments are those where you have been loaned money and paid it back quickly. Having these instances on your company credit file will prove that you can be trusted with credit, boosting your score.
Establish credit accounts with suppliers
If you frequently work with the same suppliers and have a good payment relationship to date, it’s worth establishing a credit account to increase the number of positive experiences in your credit history.
If you continue to maintain a good payment relationship, it will help to improve your overall rating.
Clear debt where possible
If you have a history of debt, one of the first steps you should take to build your credit score is by clearing debt. Start by identifying any owed payments you have, especially those that have been missed. Then, seek to make payment to remove the debt.
If you cannot afford to repay the debt, you will indicate you have problems with cash flow. It might be worth looking at cashflow solutions, such as invoice finance and trade finance. This should improve your affordability and allow you to clear the debt.
Dispute errors
If you believe there are errors on your credit file, it is essential to raise them with your credit card company or reporting agency. A negative report on your file could drag your entire score down, so it’s critical only accurate and warranted feedback appears.
When you spot something inaccurate, such as an unpaid account or hard enquiry, raising it willn help you find a solution and hopefully get it cleared. You will need to have evidence it’s not accurate, so don’t expect to use it to remove the payments you’d rather forget.
Keep a good credit ratio
A credit reporting agency will look at the ratio of credit used against the total amount of credit available when determining your credit score. For example, if your business credit card allows you to spend up to £10,000 but only use £1,000, that’s a credit ratio of 10%.
It is recommended to keep a credit ratio of around 15% or under. The focus here is not maximising credit just because you can, which might indicate the business isn’t financially stable.
Conclusion
Your business credit rating can have significant weight regarding your eligibility for funding. It can be the difference between being accepted or rejected for external finance and under which terms.
Due to the impact your credit score has, it is vital to understand yours and take steps to maximise it. By doing so, you will access increased funding opportunities for your business and give yourself more options when it comes to fulfilling your goals.
If you are searching for flexible funding options that suit your credit score, we can help you find an ideal solution. Speak to the team today.