What is Credit Scoring?
Most people are aware of a personal credit score, where your credit applications and payment record are used to build a profile of your ability to pay back a debt. The same is true for businesses, where credit agencies gather information about trade credit transactions to establish a business’s credit rating.
Credit agencies use a number of sources to find information about your company which can include payment data from company suppliers, financial reports, web mining, news and media, telephone and other print directories and, if your business is a limited entity, business registration details and financial accounts. In this way, the agency generates a report of your company’s credit history and uses this to generate a credit rating which suppliers, as well as banks and other finance providers, can use to gauge whether to extend credit to you.
In this guide, we’ll explore how credit scoring works, the problems associated with low credit scores and how to maximise the credit score for your business.
How does credit scoring work?
Whether you pay your bills on time is a vital part of the calculation of your credit rating, but it can also be affected by a number of other factors.
These factors include:
- Ratios gleaned from your company’s filed accounts
- The length of time you’ve had a credit profile
- The number of inquiries made on your credit profile
- Possible bankers’ information (subject to you giving permission for this to be made available)
- Credit card details, if you are a proprietor or partner using credit cards as one of your purchasing tools
- Any information that may be available on company credit cards
Business credit scores range on a scale from 0 to 100, with 75 or more considered an excellent rating, and some reports may have written recommendations as well as, or instead of, ‘credit scoring’.
Problems a low credit score can create
Many businesses will have become painfully aware of over the past 18 months that you cannot continue to function without credit. However, as we come to terms with the consequences of an era of cheap and available credit, where sound businesses are being punished for others’ irresponsible lending and borrowing, proving your creditworthiness is becoming crucial in the running of your business and the search for capital to grow.
But it’s not just being refused a bank loan that you need to worry about. It’s not practical, or even possible, to pay suppliers immediately, especially if you’re at the mercy of a larger client dragging its heels.
Trading relationships depend upon credit facilities being granted. With economic pressures forcing everyone to reassess risk, if you’ve got a poor credit score, suppliers may ask you to pay upfront, draw up stricter terms or even demand personal guarantees.
In short, boosting your credit score can help you to secure far better deals that will give you the breathing space you need to run your business.
Paying your suppliers on time will certainly help, but there are many other factors that can be taken into account to help you improve your chances of accessing credit and getting the most out of your trading relationships.
How to maximise your own credit score
- The first thing to remember is that quite a few credit checks end in failure because the credit check hasn’t been carried out correctly. If you fail a check and feel your credit rating is good then you should challenge the result.
- Make sure your supplier is using the correct legal name on your contract or account. That supplier will search using the name they have been given and if, for example, you file your accounts at Companies House in another name this will not be picked up.
- When filing your Accounts make sure they are filed in good time. Any Accounts shown to be filed late could go against you.
- For sole traders and partnerships the credit search is sometimes run against the individual, particularly with energy contracts. Make sure that the suppliers have got ALL your personal details right e.g. full name spelt properly, full address (covering last 5 years), date of birth, landline contact number, not just mobile. The more comprehensive the information used in the search the less likely it will fail.
- If there has been a change of ownership / change of name within the business make sure the supplier knows about it.
- If you have had a change of status i.e. only went Limited 6 months ago and not yet filed any accounts, make sure the supplier knows this and that they can search against your personal name if required.
- If you know your credit rating is fine, but the supplier says you have failed, offer a bank reference to the supplier.
- If you know you do genuinely have a problem with poor credit rating look to use a supplier that is less stringent on carrying out credit checks.
- A Sole trader or Partners who are not on the electoral register will be marked down in a credit check.
- Multiple credit checks can adversely affect your rating so if you are setting up a lot of new supplier accounts at once, all of whom will credit check the business, this can cause you trouble and should be avoided.
- Be aware, particularly with energy contracts, if you are taking on premises where the previous occupants have gone bust with debts. You can inherit the bad credit history of the address when next going through a credit check.
- Always pay on time as the payment experiences of your suppliers is a key part of your credit profile. If you have a poor payment record you can detrimentally affect your ability to get credit.
- Credit agencies check various sources such as online services and Companies House to confirm that your business is genuine, so ensure your business is listed in online and telephone directories and, if you are a limited company, that company registration details are accurate and up to date.
- Include the names of suppliers who can vouch for your payment record on credit application forms.
- Beware where external debt, such as money owed to banks, is much higher in proportion to shareholders equity. This is looked upon dimly by credit agencies.
- Having a positive working capital will also affect your credit score. Credit agencies will take into account the difference between your current assets and liabilities, or what’s coming in and going out of your business on a daily basis.
- Manage your sales ledger effectively and stay on top of credit control. If you can ensure your clients are paying you on time, you can, in turn, pay your suppliers promptly.
Conclusion
The various credit agencies agree that businesses must stop seeing credit scores as some kind of hidden weapon used by credit granters to restrict their business growth. Instead, they should look at credit scores as a very useful tool that they can learn to utilise to help their businesses grow.
Hopefully by being aware of just some of the factors above this Guide can help you to maximise your credit rating and help your business to flourish.
This Guide is brought to you compliments of Spiral Group.
About Spiral Group
Spiral Group specialises in bespoke cost reduction programmes for individual businesses. The Directors of Spiral have over 50 years combined experience in advising businesses of all sizes about how to maximise their profitability.
Bira members receive preferential rates with Spiral Utilities, find out more here, alternatively contact Andy McCorquodale at Spiral via email or call on 01204 282062 for more details.