When seeking finance, every business wants to be in a position where they get accepted for any funding they apply for. Being in this position means having a strong business credit score.
Your credit score is a reflection of your credit history. Your credit history is an account of your business’s lending, including any loans taken out (including credit cards, leasing and short-term finance), any late or missed payments and any outstanding debt. Your credit score is generally marked out of 100: the higher your score, the more reliable to lend money to you will be seen.
The consequence of a low credit score is that you may find yourself more frequently rejected when applying for finance. If you are a new business, you may find that you do not yet have any credit history to speak of, which can pose another obstacle. While solutions for these types of businesses are growing, it is in your best interest to do what you can to improve your credit.
Fortunately, there are steps your enterprise can take to build up its credit score. We have put together our eight top tips to getting and maintaining good credit so you can reap the benefits.
- Review your credit history
- Consider credit reference agencies
- Use credit for your company
- Make payments on time
- Keep debt levels to a minimum
- Settle court judgements promptly
- Develop good relationships with your suppliers
- Avoid closing accounts
Review your credit history
The first step to building your company credit is reviewing your history to date. By doing this, you can find out your score and take decisive action to improve it.
There are many bodies out there which will provide you with a credit report for your business. Aim to find a provider who offers it for free or as part of a trial. These may include Experian, Equifax, CreditSafe and Dun & Bradstreet, for example.
Once you have a copy of your report, it will include information of any credit obligations you have (such as loan repayments), trade or supplier credit and any past issues with debt or bankruptcy. Take time reading through to determine where your credit strengths and weaknesses, and any lessons to be learned.
Make sure you can account for the different occurrences in the report. If something looks unfamiliar, reflect on your past accounts to see if you can find the source. If you believe it is an error, this should be flagged as it could be unnecessarily impacting your credit score.
Remember to review your credit report regularly. This will allow you to see how your credit score changes over time and whether your credit-building measures are paying off.
Consider credit reference agencies
If you are a relatively new business, you will not have an extensive credit history, which can make it harder to prove your reliability to a lender. You will need to build up your credit to achieve a high score.
Make sure you are registered with a credit reference agency (CRA), such as Experian or Equifax so that they can begin taking record of your credit history and calculate your score accordingly.
The easiest way to make sure these agencies begin to collect information on you is to seek finance from lenders that pass on details. Banks tend to do this: so, if you take out a bank loan, they will automatically report it to the CRAs who will add it to your credit file.
Many alternative lenders will also pass information onto a CRA, so it is worth checking that this is the case on any loan you take out. By doing so, you can allow these CRAs to have tabs on your business credit, which can then be used to build your credit score over time.
Use credit for your company
In order to have a credit score, your company needs to use credit. While you may believe that avoiding credit can reduce the risk of debt and prevent a poor credit history for your business, it can mean there is no proof that you can be trusted to repay a loan. The majority of companies will need to take out credit at some point during their lifespan, and a lack of credit history can make this difficult.
That is why it is beneficial to use credit in your company. This does not need to be excessive – instead, look at what funding you need in your business that can be sought through credit. This could include a company credit card for expenses, asset finance or a short-term loan. It can also include direct debits to your energy providers or using credit to pay for your insurance policies.
When using credit, ensure you follow the rules set out by your lender – such as meeting payments on time. Do not take out credit for the sake of your credit score if you believe you will not be able to meet repayments, as this will just harm your score and your business finances.
Make payments on time
The easiest way to boost your credit score is to ensure you meet all your repayments on time. Late or missed payments can count against you, so take appropriate action to avoid these where possible.
Meeting payments on time is usually enabled by your company’s cash flow, so aim to keep this running smoothly where possible. Keep tabs on your regular outgoings – including any bills, recurring payments or loan repayments – and track these against your monthly incomes to make sure the two are balanced out.
If you fear you cannot meet payments, it may be time to consider dipping into any business savings or cutting expenses elsewhere to make the repayment in time. You may also want to open a conversation with the lender to find out if there are any extension opportunities, which may mitigate the impact on your credit score.
Keep debt levels to a minimum
Another red flag on a credit report is any debt that the business has previously been in or is currently in. Debt could indicate to a lender that you are not in a stable financial position and that this could prevent repayment on any loan they offer you.
Aim to minimize any borrowing your company does, as this will reduce the risk of debt. Only take out loans when you need to and aim to have as few loans as possible at any time (for example, a larger loan from one provider rather than smaller loans from multiple lenders). When taking out any loans, read the terms carefully and be confident that you will be able to meet the repayments.
If your business has had periods of debt previously, this will impact your credit score, even if you are a better financial position now. However, aim to find alternative lenders who will still provide loans to you, and use this as a stepping stone to build your score back up.
Settle court judgements promptly
If you repeatedly miss a payment, there may be cases where the lender chooses to take you to court. When this happens, you will receive a County Court Judgement. These last for up to six years on your credit report and can lower your credit score.
While you should do everything you can to avoid a CCJ, if one comes through your door, you need to take action. Ignoring it will only lead to increased consequences for your business.
Aim to settle the CCJ within 28 days of receiving it. This means proving it was raised against you in error to the courts or paying the owed money. By settling the CCJ in this timeframe, it won’t be recorded against you, which can prevent damage to your credit score.
Develop good relationships with your suppliers
Another way to support your credit rating is to maintain good relationships with any suppliers who you make regular payments to. Assuming that you have an established history with these suppliers and efficiently meet payments, it may be worth opening a credit account with them. This will allow positive credit occurrences to be added to your file.
This is particularly apt as not all lenders and suppliers will share your payment history with CRAs. However, by collating these positive credit experiences, you can manually add them to your file via a CRA to give your score a boost.
Maintaining strong relationships with your suppliers will also make them less likely to take action against you as quickly if you should miss a payment, which can further prevent blots on your credit record.
Avoid closing accounts
Finally, avoid closing off credit accounts on behalf of your business, even if they are paid off. By closing an account, you remove it from your credit history, which essentially means you are removing evidence that your company reliably paid off its debt to that lender.
If you do not plan to use the account in the future, consider still leaving it open. This will allow you to continue to benefit from their impact on your business credit score.
By following the measures detailed here, you can help your business to build up to a good credit score gradually. The result is better access to different sources of funding, which can allow the company to reach future levels of growth and overcome financial barriers.