Doing business used to be about a company’s reputation, the relationships its bosses had within their industry, and how an enterprise was perceived in the community. But, in the 21st century, much corporate decision-making has become automated, with computers and algorithms calculating how well a firm is faring. In particular, the credit score of an SME can often determine whether it will win a new contract, if it can borrow money, or what kind of deal it gets from service providers. Yet, many small business owners remain oblivious to the impact credit reports have on their operation.
- Four out of ten SMEs have never checked their credit scoring, according to credit reference firm Experian. Micro businesses, with fewer than ten employees, are the least likely to know their credit status.
- Only a third of business owners realise that a history of bankruptcy or multiple applications for credit in a short time could have a negative effect on a firm’s credit ranking. Even fewer company bosses know how to improve their credit score.
- Others wrongly think that factors such as using their overdraft, making staff redundant, and having more than five credit card holders in the business would count against their enterprise in credit terms.
Does your business’s credit rating matter?
A lot of SME owners still rely on trust and gut instinct when making professional decisions. We at Boost Capital also take the view that no business can be simply reduced to a series of numbers on a page. We consider other factors such as monthly sales and how much revenue a business is generating when deciding whether to lend to a firm, as we’ve talked about on this blog before.
But the truth is that credit scores do matter in many respects. Banks certainly rely on credit reference agencies when determining whether to give a company a loan. Other SME owners will call up a firm’s credit report when deciding if they should extend credit or do any kind of business with an enterprise. And mobile phone providers, landlords, and insurers weigh up a business’s recorded credit-worthiness when assessing what sort of contract or deal to offer.
What information counts towards your credit score?
Credit scores are designed to give an indication of a firm’s likely behaviour, and the probability of it defaulting on payments or agreements. Credit reference firms such as Experian, Equifax, and Callcredit turn to a number of sources when compiling their reports:
- Suppliers are asked for data about accounts receivable – money owed for goods and services bought on credit. This gives agencies valuable information about trade payments and tardy payers. Collection agencies also give credit reference agencies details of commercial collection claims they’re pursuing.
- Previous credit transactions are scrutinised, such as whether your business has used credit in the past, how many lines of credit it has, and whether you’ve exceeded any of your credit limits. This could include payments to credit card firms, utility providers, loans, mortgages, or bank repayments. Missed or late payments stay on the record for at least six years, according to charity the Money Advice Service.
- Fraud checks will reveal if any directors have committed fraud or been the victim of identity theft. Bankruptcy filings, any legal suits, and County Court Judgements (CCJs) also go into the compilation of a company’s risk profile.
How to improve your score
Some business owners mistakenly believe that having a healthy bank balance, paying bills before their due date, taking on extra staff, and moving into bigger premises could boost their credit rating. None of these things make the slightest difference to how creditworthy an SME is regarded to be. But Experian has given businesses some tips on how they can polish their credit score. It suggests:
- Find out your business’s credit rating. Credit reference agencies have a statutory obligation to provide a credit report for £2, and it can be worth getting your company’s report from all three main agencies to see how their information compares.
- Check your firm’s credit record closely to ensure that it reflects the current state of the company. Reports are based on information gleaned from third parties, so it’s possible out-of-date issues are still influencing your score.
- Pay your bills on time, and also file your accounts and annual returns by the given deadline. Making late payments will affect your credit risk profile, and could lead others to believe that your business is in trouble. Late submission of key financial statements can also be a warning sign.
- Avoid CCJs, and if your enterprise does receive one, settle it as soon as possible, preferably within the month.
- Watch your personal finances, and individual credit record. When businesses are very small or newly formed, those checking the viability of a firm may look at directors’ personal financial situation as a measure of the integrity of a company. If a business is independently owned, and has fewer than four directors or proprietors then it may be possible to get consumer data about those running the enterprise – subject to the individuals’ consent.
- Make your business visible. Just as with personal credit reports, having little available information about your SME is likely to count against you. For this reason, it’s wise to think about getting a business credit card if you haven’t already got one – though be sure to meet its repayments. Register with a credit reference agency, as well as listing your company on directories such as Yell or Thomsons.
Challenging your credit record
If you find information on your record is out-of-date or inaccurate, you can contest it. Are the given addresses right? Is all the account data as it should be? Is your borrowing properly presented? If there are default notices on the file, suggesting your firm lapsed on a repayment, see if they’re correct. Sometimes, identity theft comes to light this way if a loan has been taken out fraudulently in the business’s name. Perhaps you’ve paid off the loan in full, but the report suggests it’s still outstanding.
If you have a complaint, write to the credit reference agency asking it to change the register or remove false information, and provide evidence, if possible. The agency should reply within 28 days saying whether their investigations have revealed if your concerns are justified. It’s also possible to write a Notice of Correction, a statement up to 200 words in length that can be added to your file, explaining a missed payment or equivalent black mark. The Information Commissioner’s Office has more detail about the process of disputing your credit score.
Your business’s credit record isn’t everything, but it is does matter. Check it regularly, and try to keep it in as healthy a state as possible. Other people will be looking at it, so you should know what picture it paints. And, then, take some control over what it says about your firm.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net