Credit scores play a crucial role in both our personal and business finances today. Whether you’ve been in business for years or are just about heading into your first startup, you’ll need your business credit score in tip top shape as you endeavor to grow.
By Sharon Pascoe
A survey conducted by ComRes for Experian in 2014 that questioned leaders of UK SMEs showed us just how much the business credit score can be overlooked. Over 85% of the business leaders questioned couldn’t identify the most vital factors impacting a businesses credit rating. 59% of small firms had never checked their commercial credit score, and out of the ones who had, only 44% had checked their score within six months of the survey.
Businesses need high credit scores to ensure good cash flow and effective credit control. In this article, we’re highlighting 5 key actions small and medium businesses can take to prevent drastic falls in their business credit score, as well as raise it if needed. We’ll start with:
1. Trade financing and B2B credit
This is almost the same as securing a short term loan from a supplier. Typically, terms span over a 15 – 30 day period. It is often known as business-to-business credit and basically entails your business accepting some form of credit from another. As long as you agree achievable credit terms and keep up with repayments promptly, your business will improve its payment record and increase your reputation as a borrower. It’s always vital that you credit check your potential suppliers before ever seeking terms with them.
2. Using a secured business credit card
Secured business credit cards come with a deposit. You’ll need one of these cards if you have a poor credit rating. The deposit serves as security and in most cases will be around £500. Some providers will have a policy against brand new businesses, and may state that applicants have a business that has been in operation for a certain number of years. This is one of the best reasons for new business owners to seek some form of credit in the early stages; to build a business credit score that will allow smoother borrowing in future. Should you take one of these cards, it’s important to never exceed 10% of your borrowing revenue if you want to see a steady rise in your credit score.
Moneysupermarket.com provide a helpful guide on choosing the right business credit cards for your circumstances. You can also consider “fleet” or “prepaid” cards. These are ideal if you have a poor personal credit score. In contrast to secured credit cards, the deposit for prepaid cards is usually less than £500.
3. File your business accounts correctly
If your business is a limited company, all UK credit agencies will reference information they can gather from the accounts that have been filed at Companies House. So there a number of accounting practices you can do to help protect and improve your company’s credit score. Firstly, you should always try and file full accounts as opposed to abbreviated ones. Abbreviated accounts give less information, a lesser P & L account and only a short balance sheet. If your accounts tell a good financial story, you should be showing that story off with a full set of accounts.
Another aspect is timing. Just like everyone else, credit agencies don’t look favourably upon late submissions. If your accounts only reach Companies House just before a deadline, the time it takes to process the submission can push it over the deadline. It’s common for credit agencies to classify these filings as late which can result in damage to your company’s credit score. File accounts as early as possible, especially if your finances are in good presentable order!
4. Seek revenue based financing
Revenue based finance wil be attractive to those that have a credit score within the 500 – 600 range. Rather than being based on your current credit rating, revenue based finance is based mainly on the bank deposits your business makes, how often you bank and the amounts you work with.
Because the repayments of such arrangements are kept in close relation to a company’s debit or credit card sales, many small businesses will benefit from the flexibility that comes from this form of credit. Compared to a bank loan, these loans can be agreed faster, as the lender can access details of the applicants bank accounts far more quickly.
5. Make all payments promptly
The more consistent you are with paying invoices and re-payments on time, the better your business credit will be. Failing to make payments before they are due is a sure way to damage your credit rating. This is especially important when you owe money to a company that you suspect may report directly or indirectly to credit agencies. Paying late is likely to impact your Paydex number. In contrast, paying early can be a great way to boost your business credit score going forward.
Sharon Pascoe has been a finance content writer for over 8 years and now writes for Finance and Lifestyle, the blog of First Quality Finance