14th July, 2020
How to improve your business credit score
Many of us take credit for granted. Our purchasing decisions often rely on credit without us even thinking about it. Only, perhaps, when we seek to buy a larger item – a house or car, for example – does the issue of credit become more obvious. This is especially true if you’ve ever had an application for a loan or a mortgage turned down, or even a credit card. Indeed, it is usually after being declined credit, that we truly appreciate the value that credit adds to our lives.
But while we, as consumers, are perhaps more alive to the importance of a positive credit score, the same is not necessarily true of small businesses, including limited companies. In this article we cover the importance of your business having and maintaining a positive credit rating, how to improve your business credit score, and how being on top of any changes to your accounts and keeping key parties up-to-date can help improve your access to credit.
This demand for credit is what keeps the world turning. We only have to think back to the challenges of 2008, and the so-called ‘credit crunch’, to understand the difficulties that occur when credit dries up. The crunch did, however, highlight the importance of having a positive credit ‘score’ to consumers – the system used by the Credit Reference Agencies (CRAs) to determine whether you are a good or bad ‘risk’. Put more simply, it’s the score that says whether the money you effectively borrow will be paid back.
Recognising the importance of being a good ‘risk’
While consumers have very quickly learned the importance of a positive credit score, the same is not necessarily true of small businesses. As with many consumers prior to the squeeze, small companies have perhaps taken it for granted that they will be given – or ‘extended’ – credit without really understanding the reasons when credit is declined. This could see SMEs missing out on credit from suppliers – and therefore potentially missing out on new business – simply because they haven’t considered fully how their actions impact how others see them.
Credit is not a given right
Credit is an essential business tool, but it is not a given right. Just as a consumer is given a credit score, so too a business is given a credit ‘rating’. Credit ratings are used by the credit reference agencies to assess a company’s ability to pay its bills. They are based on criteria, such as a company’s payment record, as well as external factors, such as the risk of the market in which they operate. A positive rating gives confidence to suppliers – especially new suppliers – that you are a company worth doing business with. A poor rating, conversely – as with a poor consumer ‘score’ – can seriously impact your company’s future access to credit.
How to improve your business credit score
So, what can you do about it? Here are five simple tips to help you turn a ‘no’ into a ‘yes’, by improving your credit score and so help your business grow:
1. Avoid negative information
One of the easiest ways to increase your business credit score is to make sure there are no outstanding legal judgments regarding your business that you may not be aware of – for example, in the UK this might be a County Court Judgment. If you have any outstanding judgements, clear them.
2. Be open and honest
The more information you provide about your business to a potential business partner, the better. A lack of data can often be interpreted negatively, as though you may be hiding something.
3. Maintain a trading track record
Agencies are looking for a healthy balance sheet and good supplier relationships. One of the best ways of demonstrating strong supplier relationships is paying your existing suppliers on time. Within the UK, most banks support the faster payments system for business payments; while for international payments an app such PagoFX by Santander can help in transferring money abroad quickly, securely and at low cost directly into the supplier’s bank account, supporting payment best-practice.
4. Keep filing up to date
As with the need to be honest and open, if you are obliged to file accounts (different countries have different rules) then do so as requested and within an agreed timeframe. Failing to do so invariably gives the wrong impression.
5. Retain profit in your business
It’s a relatively simple thing to do, but retaining a small profit demonstrates an ongoing investment in your business that Credit Reference Agencies and potential partners like to see, and therefore can boost your company’s credit rating.
Explain any variations and movements in your accounts
There are, of course, many other ways of improving your ratings: every small business should maintain a positive net worth, for example, and help themselves by filing a profit and loss account that explains any movements and helps prevent wrong assumptions being made. Positive working capital is similarly important, since it is a vital measure of cashflow, and information such as the nature of the business and VAT (in the UK, or similar taxes elsewhere) registration numbers should be readily available to ensure your business is easily and accurately identified.
Keep the conversation open with suppliers and CRAs
As well as these tips for building and managing a sound credit history, businesses can help themselves by creating a dialogue with their suppliers. Talking to their suppliers is key, but companies should also talk to the experts – the credit reference agencies – about any specific requirements they may have. Every agency and credit-granting organisation uses slightly different decision-making methodology and criteria, so it can pay to know what type of information will help improve your business’s credit rating, and so help improve your business performance.
Keep your business payments and trading record on track by making international payments with PagoFX by Santander. It’s the low-cost, secure and fast way to make business payments abroad, backed by Santander and regulated by the Financial Conduct Authority (FCA). Sign up as a sole trader today, with our service for limited companies starting soon.