While most consumers are aware of their credit score and how their credit report is assessed when applying for borrowing, many businesses may not understand how their credit profile impacts access to commercial lending or how to verify what a prospective lender may perceive when evaluating their credit history.
Business credit scores rely on many of the same criteria, looking at responsible borrowing, on-time repayments, and whether the organisation has been subject to defaults, court filings or other more serious issues. James Todd & Co, Fareham accountants specialising in commercial clients, explains all companies need to know about checking, monitoring and boosting their credit profile.
The Importance of Credit Scoring for Businesses
One of the most important reasons company owners and directors should be aware of their credit score is that this can directly influence both the availability of business financing and the fees and interest rates they are likely to be offered. While there are numerous potential forms of commercial funding, a lender may review a business credit record when considering the following:
- Business loans and credit cards
- Overdrafts
- Asset finance and invoice factoring
- Commercial mortgages
The right solution depends on the business's needs, and we recommend that any company experiencing cash flow challenges or needing borrowing consult an independent and experienced accountant or business adviser to ensure they make astute and financially sound decisions. However, regardless of the line of credit a company may wish to apply for, their credit score will come into play.
How Can UK Companies Check Their Credit Scores?
There are several credit reference bureaus in the UK, and each uses a different scoring system. This factor can make it challenging for some businesses since a lender accessing their credit report from one bureau may have slightly different information that the company uses to improve their financial position. Our advice is to access credit reports from at least two bureaus; since timing differences and different event logging processes mean this provides a better overview than relying on one standalone credit report.
The largest agencies include Equifax, Dun and Bradstreet, Experian and Creditsafe. Most banks will select one agency or employ a credit controller responsible for reviewing applicant companies' credit records to make lending decisions.
Credit agencies often offer free registration and a limited number of credit reports, after which companies are usually asked to pay a small fee to receive regular updates. Registering to receive notifications relevant to your business can be worthwhile, ensuring you are informed whenever changes are made to your credit report.
Understanding Business Credit Scoring Systems
Although each agency uses a different scoring system, many implement a scale of 0 to 100, with a score of 0 – 25 representing a significant credit risk. Companies with credit ratings below 50 are categorised as above-average risk, with anything above 91 considered highly creditworthy. Reports that use a different method can be extrapolated onto a comparable scale and provide an 'outcome' score, the main reference point from a credit control perspective.
Credit scores are not only reliant on making payments on time and also take into account the following:
- The business borrowing history.
- Financial statements and filing compliance.
- Previous loan applications.
- Company ownership and trading.
Some instances, such as having CCJ issued against the company, can cause a credit score to plummet. In contrast, companies may also find they have an unexpectedly low credit score due to the absence of a borrowing history to demonstrate on-time repayments or because they are consistently late filing their statutory returns.
How to Improve a Commercial Credit Score
Once you have accessed your credit reports and assessed your score, the first step is to determine the information included and contact the referencing agency if any errors require correction. In most cases, this involves sending details to the original issuer, such as a bank or lender, with evidence to demonstrate why a logged credit event requires amendment.
From there, businesses can gradually improve their credit score in several ways, a particularly valuable exercise for organisations expecting to apply for credit, such as a commercial mortgage to expand to a larger premise.
Filing Returns and Annual Accounts
Statutory returns and year-end accounts should always be filed with Companies House and HMRC by the due date. Late filing can indicate financial difficulties, so filing in good time and ensuring any attachments or additional information is included can avoid unnecessary blips in a company's credit score.
Responsible Financial Management
Businesses that settle accounts on time, including creditor accounts payable, loans, borrowing repayments and company credit cards, build a positive payment history. It is also important to have a dedicated business account rather than using a personal account for business transactions – a common error for small businesses or sole traders.
Much as registering on the electoral roll can enhance an individual credit score, a business bank account gives a referencing agency the data to cross-check, ensuring your financial transactions contribute to your credit report.
However, having multiple accounts can be problematic, especially if you have several company borrowing accounts that are not required – removing overdraft facilities or unnecessary company cards reduces the amount of available credit reflected in your report, which can be a sign of unstable borrowing.
Updating Company Information
Changes to the business, such as ownership, shareholdings and your registered address, should be updated with Companies House and HMRC promptly. If a credit bureau runs a check and finds inconsistencies in your details, such as different trading addresses, this can negatively impact your credit file.
Avoiding Excess Credit
Whenever applying for financing, we always recommend conducting thorough research and ensuring whichever products you select are suitable and with a lender who will likely approve the application. Applying to multiple lenders and having numerous hard credit searches recorded on your credit history can give the appearance of poor cash flow management.
Likewise, businesses should always attempt to resolve conflicts or disputes around payments or contracts amicably and swiftly, where escalations to court claims can cause long-term credit damage.
Finally, as a business owner or director, your personal credit score can influence the business's financial standing, particularly for smaller companies or those without a long trading history. Lenders may ask to run personal credit checks and consider these alongside the company credit profile; any serious issues can have a detrimental effect on business borrowing prospects.
For any further information about finding out how healthy your company credit score is or taking action to improve and restore a positive rating, please get in touch with James Todd & Co accountants in West Sussex to arrange a good time to discuss.
Read more about James Todd & Co - What Matters Most for UK Business Financial Health - Cash Flow vs Profit
About James Todd & Co
James Todd & Co have been providing accounting services for more than 30 years across Chichester, Farnham, Lavant, and Sussex and Hampshire businesses. Their clients trust them to provide bookkeeping, financial auditing and compliance, management accounting and financial advisory services.
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Source Company: https://www.jamestoddandco.co.uk/
