Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
Lenders use a business credit score to evaluate whether a business is creditworthy. Each time you apply for a business loan or credit, the lender takes into consideration your level of financial risk. They then use your business credit score to approve or deny your application. However, a joint survey by Experian and ComRes in 2014 found that 59% of small business owners have never checked their business credit score, and this still rings true today.
While many assume they mean the same thing, business credit is the ability to qualify for financing while a business credit score refers to the actual numerical rating. A business credit score works similarly to a personal credit score, however, each one is different and usually doesn’t impact the other. The only time your personal credit score will count towards your business finances is if you register as a sole trader.
Business Credit Score 101: Why It Matters
Often, opportunities exist that cost more than the cash you have available, meaning you might rely on credit to take advantage of them. Without the ability to get approval from a lender, your business operations may stagnate and your income potential may be limited. In addition to influencing whether or not you get a loan, this score affects repayment terms and interest rates. A business with a lower credit score may be granted business credit, but it may come with a higher interest rate and a lower spending limit.
The first step to growing your business through credit is understanding how business credit works and is calculated so you can use it to your full advantage. To make sure that your score is as high as possible, start by learning what your current score is and then proactively manage it. You should protect your score just as you would any other key parts of your business.
How your business credit score is calculated
Your business credit score is calculated by evaluating a wide range of data about your business and finances. There are several credit reference agencies (CRAs) in the UK, such as Experian and Equifax, and each one uses different methods to determine your score. In general, they might consider the following factors:
- Credit utilisation ratio
- Payment history
- Age of credit history
- Existing debt
- Public records
- Company size
- Industry risk
- Number of recent credit inquiries
Many business owners are a bit surprised when they first see their business credit score because the range is calculated from 0 to 100 points, instead of the 0 to 999 point scale used for personal credit. The exact interpretation of the score depends on the credit agency. For example, Experian marks scores over 80 as low risk and under 25 as high risks.
Increasing your business credit score
Once you gain business credit, you should protect your score and actively work to increase your rating. This can make it easier to get credit for future growth. Many of the strategies for improving your business credit score are similar to those used to increase personal credit scores. Here are some of our top tips:
Make your repayments on time. In addition to resulting in costly late fees, late payments can lower your score. Consider setting up automatic payments to ensure you don’t miss paying your bills.
Use credit opportunities to build your score. If you do not use credit, then you will have a short credit history and possibly a low score. So, avoiding credit altogether can be counterproductive. When your company is starting out, proactively obtain credit and pay it off so that you can access additional credit for an unexpected emergency or growth opportunity.
Review your business credit report regularly. Dun & Bradstreet, Equifax, and Experian are the three major companies that provide business credit scores. Occasionally errors can be made that lower your score so be sure to contact them if you see an anomaly.
Monitor your credit utilisation ratio. This is the amount of credit used versus the amount available. For example, if you have a business credit card with a £10,000 limit and you carry a £1,000 balance, then your credit utilisation ratio is 10%. ClearScore recommends a ratio that is lower than 30 percent.
Make sure paid loans are removed from your report. Sometimes credit companies do not remove a debt from your account after it is paid, which can inaccurately increase your credit utilisation ratio. Reach out to the credit agency reporting the inaccurate debt and request that the paid loan is removed.
File disputes for errors in a timely manner. By letting an inaccurate account or missed payment stay on your account, you further damage your score and miss opportunities.
Many business owners assume that debt is something to avoid when starting and running a business. However, wisely investing money in your business can help you establish a credit history that will improve your business credit score. By proactively managing and growing your business credit score you can access credit more easily and quickly, which can help you grow your company.