4:00 AM 30th October 2021
Saturday Essay: Understanding Business Credit Scores
Most people are aware that credit scores are incredibly influential when it comes to their personal finances. Indeed, they are vital to accessing finance, such as mortgages and credit cards, which help people achieve their financial goals.
However, the importance of a business credit score is often overlooked, and this has created a knowledge gap among UK business leaders. A survey conducted by Manta, an online community for small business owners, revealed that the majority (72%) of small business owners do not know their business credit score, while more than half (60%) were not aware of where they could access their scores.
Of course, a company’s failure to understand its credit score can create financial problems later down the line, should it need to access finance to aid growth. So understanding the basics of company credit scores, and how they can be strengthened over time, is vital.
What are business credit scores?
Business credit scores measure the creditworthiness of a business and outline its ability to pay back loans. This allows lenders, insurers, and stakeholders to assess its financial health.
Credit scores can range from 0 to 1000, depending on the credit reference agency, with higher scores indicating that a business is in good health. As such, companies with higher credit scores are more likely to see applications for credit accepted by lenders.
Several factors can influence credit scores, late payment of bills, or the number of times a company has applied for credit, to name a few examples. Other considerations may include negative public records on business profiles, such as debt collections, or the timeliness of filing company accounts (if applicable).
The importance of business credit scores
Business’s credit scores are available for anyone to view. As such, potential lenders, or even prospective investors, are able to view it and assess whether the company in question is too risky for them. For this reason, and others, it is beneficial for organisations to keep up a strong credit score.
Furthermore, credit scores influence how much a business can borrow, as well as the rate of interest charged. The better the score, the more stable a business appears, making its applications for a loan more likely to be accepted.
Indeed, access to such finance can facilitate the long-term growth of an organisation, improve cash flow and aid expansion and innovation.
There are a great many benefits to maintaining a strong credit score. So how exactly can businesses grow their credit scores?
Growing a stronger credit score
Luckily, it is fairly simple for a business to build its credit score – it simply requires careful planning and patience from company directors.
First, it will be beneficial for organisations to ensure all payments are made on time, from credit payments and invoices to small fees; even the smallest delays can scupper organisations’ scores in the long term.
Additionally, companies should limit the number of times they apply for credit. Credit reports are updated with every credit application and are used to highlight the financial health of a business. So multiple applications within a short space of time could suggest a business is struggling and negatively impact on its overall score.
Ensuring business administration is all up to date is equally important. This will include filing the business’s accounts and tax returns on time. Doing so outlines the competence and organisation of a business, making it seem more appealing to lenders.
Finally, it is vital that businesses regularly check and monitor their credit score. This will allow them to identify and address any issues. This can easily be done by visiting a credit reference agency website such as Experian Business, Dun & Bradstreet or Equifax Business.
A business credit score may seem an intimidating concept – and so too can growing it. However, strengthening credit scores can be a straightforward process. Provided businesses are patient, organised and proactive, I see no reason why they should not see their credit score gradually grow over the coming years.
Nic Redfern is the finance director for NerdWallet UK. NerdWallet is on a mission to provide clarity for all of life’s financial decisions. As an independent financial comparison website, NerdWallet provides consumers and businesses with useful tools and insights so they can make smart money moves. From choosing a bank account or breakdown cover to buying a house, NerdWallet is there to help individuals make financial decisions with confidence. Users have free access to our comparison tables and expert content, to help them stay on top of their finances and save time and money, giving them the freedom to do more. For more information, visit NerdWallet.com/uk/.