Why a business credit score is vital in helping SMEs meet their ambitions

In an ever-changing economy, the UK’s small business population has shown remarkable resilience. Inflation, energy prices and the overall costs of running businesses have all contributed to the challenges faced by those who run a small operation.

It’s vital business owners – and those who are looking to start and establish a new operation - are equipped with the best knowledge and tools to help navigate the economy they operate in.  As part of that, a business credit score is a critical part of sound business management, and plays a crucial role in helping SMEs meet their ambitions.

What is a business credit score?

Understanding and improving a business credit score is key to navigating the challenges of starting and establishing a new business. A business credit score is the measure of a business’ creditworthiness and is made up of a number of factors to determine its financial position and its level of financial risk.

Maintaining a good score helps businesses secure the best investment opportunities. It enables small businesses to access better financing opportunities that drive expansion and innovation, enhancing the overall credibility of the business and build relationships with suppliers and lenders.

Conversely, if a business credit score is low, the business will have to pay more to secure finance, pushing up overall costs while giving the operation less to invest. The Experian Business Credit Score is based on a scale from 1-100, with scores above 80 considered excellent.

The benefits of a good business credit score

A strong business credit score brings a number of benefits:

1. Access to financing: Lenders use business credit scores to assess the risk of lending to a company. A higher score indicates lower risk, making it easier for businesses to secure loans and lines of credit. This access to financing is essential for growth, whether it's for expanding operations, purchasing new equipment, or managing cash flow.
2. Building trust with suppliers: Suppliers and vendors often check business credit scores before extending trade credit. A good score can lead to better payment terms, such as longer payment periods or larger credit limits. This can improve a company's cash flow and operational efficiency.
3. Attracting investors: Investors look at business credit scores as part of their due diligence process. A strong score can make a business more attractive to potential investors, as it demonstrates financial stability and responsible credit management.
4. Negotiating better terms: A good credit score can give businesses leverage when negotiating terms with lenders, suppliers, and even customers. It can lead to lower interest rates on loans and better terms on contracts, ultimately saving the business money.

 What impacts and improves a business credit score?

Several factors influence a business credit score. A strong record of repayment history is the most important but there are others which also play a role in determining a score.

1. Payment history: This is one of the most important. Timely payments on credit accounts, loans, and other financial obligations positively impact the score. Conversely, late payments, defaults, or delinquencies can significantly lower the score.
2. File full accounts and update information: File full accounts with HMRC and Companies House, rather than abridged, on time and in line with guidelines, to provide more data about the financial health of your business. If any of your business information changes, such as your registered office address, update it quickly with HMRC and Companies House, and notify suppliers, partners and customers. This will help to keep your business credit score data accurate and up to date.
3. Applying for credit: If you’re a sole trader or part of a non-limited partnership seeking business financing, it’s crucial to be aware of the potential impact on your credit rating, which differs from limited businesses. Many lenders offer the option of checking your eligibility for financing without any adverse effect on your credit score. For non-limited businesses, applying for financing without this eligibility check may trigger a credit search, subsequently recorded on your business credit record. If your application is denied, it can lead to a credit score decrease and making multiple financing applications simultaneously could signal financial struggles to lenders.
4. Use business finance and open a business account: If you’re a new start-up or a microbusiness, it’s important to use business finance rather than personal credit or personal guarantees to build up your business credit score and provide an accurate picture of the business’s financial health.This will help you to keep your personal and business finances separate and protect you from risk. Lenders may look at your personal finances, if you have very little business information to share. Start by opening a business bank account to manage your business finances.
5. Public records: Publicly available records such as bankruptcies, County Court Judgments (CCJ) and insolvency proceedings can severely impact the score.

Understanding and maintaining a score is vital for businesses, especially those looking to establish a new enterprise. By enabling access to financing and better terms, it supports businesses in achieving their short and long-term ambitions, as well as opening-up new opportunities which will ensure success.