Having a bad credit score isn’t something that any business plans for, yet financial difficulties can force you into tight corners, resulting in late payments and considerable financial debt. If you’re a business owner and you’re wondering how to improve your business credit score, then read on.
Specialists in financial solutions, at Time Finance we can help you and your business effortlessly manage your cash flow, offering asset finance solutions and business loans alongside other exemplary services.
What is a business credit score?
Used primarily by lenders and suppliers, a company’s credit score measures the creditworthiness of their business. Ranging from 0 to 100, with the lower the score representing the higher the financial risk, a ‘bad credit rating’ (often ranging from 0-40) will make it more difficult and more expensive to secure financing, significantly slowing the growth of your business.
Why is credit score important?
During such a time of financial instability, ensuring your company’s credit rating is as strong as possible is critical to ensure the future cash flow of your business. Lenders will use your credit score to evaluate whether or not you're eligible for finance, with this figure also determining how much you can borrow. A strong credit score also demonstrates to partners, lenders, investors and customers that you’re built upon trustworthy financial foundations.
Five ways you could improve your business credit score
While a business may find themselves with a bad credit score, the important thing to remember is that this doesn’t have to be a permanent burden. There are several ways in which your bad credit score could be improved.
Pay off debt
With the aim to remove all your credit debt, start by merely minimising your debt balances through properly organising your cash flow and eliminating needless spending. One option to consider is the potential to consolidate existing loans into one loan that operates on a lower interest rate, allowing you to steadily pay off your debt in a more manageable way.
Alternatively, there are options to implement different budgeting options. One such option is a zero-based budget, this was developed by Peter Phyrr, a Texas Instruments accounts manager in the late 1960s. It could help you to justify every new investment you make, eliminating unnecessary spending and helping you focus in real time your expenditure. It could help your company in the short term by exposing spending and in the long term, zero-based budgeting could be an efficient way of improving the culture of expenditure across your entire business.
Pay your bills on time
One of the simplest ways, on paper, to improve your business’ credit score is to make sure you’re regularly paying your bills on time. As this is an integral part of how your credit rating is constructed, making sure you schedule a regular monthly payment to pay off your bills demonstrates a strong financial profile, increasing your credit score as a result.
As credit agencies gather information on your credit profile from other large businesses and utility companies. By ensuring regular payment you can prove to lenders that you are financially trustworthy. Scheduling payments within an internal calendar also puts you on the first steps to creating a more comprehensive financial timetable, helping your business improve cash flow in the long term.
Pause new credit applications
Lending companies will consider your business a bigger risk if you’re continuing to make new credit applications before first paying off existing debt. While it can be attractive to apply for even more credit to help you grow your business, this will only create more long-term problems, increasing your debt and making you seem like more of a risk to lenders in the process.
It’s wise to check your business finance eligibility before thinking about applying for further credit. We know that improving your credit score isn’t always straightforward, but the more you can do to help provide clarity to lenders that you are reliable the greater the options you have available to you.
Open a business bank account
Opening a business bank account should be one of the first activities you should undertake. Separating your personal and business transactions, a business bank account simply allows you to better understand your company’s cash flow. It also gives lenders and other companies transparency into your business, proving that you can successfully manage your accounts, thus improving your business credit score as a result.
Keeping business transactions separate from personal transactions also helps to protect you from risk, allowing you to demonstrate your strong personal credit score, even if your business credit rating is low. To further improve your financial position, shut down any personal or business accounts that are no longer in use or only operate with very low activity.
Maintain good Companies House relationship
Companies House, the government agency, keeps a register of national companies. It is the central point all lenders will refer to when verifying your business. It is vital that you provide all the legally required information to them on time. Accounts, changes in trading names, resignation and appointment of directors, shareholding etc or all vital information which should be kept up to date instantly. The greater the level of information you provide the more transparency lenders will have of your business, helping to boost your credit score in the process.
Maintaining a strong business credit score
Once you have made an effort to improve your business credit score, your next challenge will be to maintain the rating going forward. The easiest way to do this is simply by being sensible with your finances. Only apply for credit when you really need it, as the frequency by which you reach out to lenders is recorded, which could negatively impact your credit score.
It’s also important, once you’ve paid off existing credit debt, to properly manage your credit limit going forward. ‘Maxing out’ your credit limit can hurt your credit score. It’s recommended that you keep your credit utilisation rate (CUR) at around 30%.
How do you get a bad business credit score?
A bad business credit score can make it far more difficult for a business to secure important financing or favourable deals, so ensuring you and your company have a healthy credit rating is essential. To do this, it’s key to know how exactly a company can get a bad credit score, with a number of different factors playing into this vital metric.
- Making various credit applications: Especially when done with different companies at the same time. This might appear to help your business’ cash flow in the short term, but it will severely damage it in the future.
- Late payments: Missed or delayed payments to credit cards or other existing loans, damaging your credit and company reputation as a result.
- Debt: Too many missed payments or defaults on a loan can lead you into debt, with this telling credit agencies that you cannot handle your finances well.
- Failing to comply with Companies House: After the end of each financial year, you should prepare your annual accounts to send to Companies House. Failure to meet their deadlines will result in a bad credit rating.
How is business credit different from a personal credit score?
Two sides of the same coin, there are many similarities between personal credit and business credit, as well as plenty of differences, too. The most clear difference is that personal credit can be affected by the finances of one's own life, including a mortgage and utility bills. Meanwhile, business credit is only affected by internal financial affairs, such as various credit applications and improper communication with Companies House.
Affecting the terms and cost of a loan, business credit can be checked on specialist websites. Many of these platforms charge a fee for these checks, though there are other free services available to use at your discretion.
Funding Solutions with Time Finance
Looking to boost your business? At Time Finance, we provide the tools for you to transform your cash flow, offering such services as invoice finance solutions and ABL loan services that will give you and your company the confidence to succeed and achieve further future success.
Understanding just how challenging it can be to operate a business, we offer a range of solutions along with expert knowledge delivered by our team of experienced specialists that will help you optimise your company. Contact us now to discover how we can help your business to flourish.