Before a lender will let you borrow money for your business, they’ll want to make sure it’s likely you’ll be able to pay them back. They do this by looking at a number of different factors, one of which is your business’s credit score.
A low credit score can affect your ability to get business finance from some lenders. You can read more about how both personal and business credit scores work in our knowledge guide.
So how do you improve your business credit score? Well here are some steps you should follow:
- Check your report
- Correct errors on your report
- Pay your bills on time
- Apply for business credit
- Open a business bank account
- Take on a director with good credit
- Consider incorporating
- File your accounts and tax returns on time
- Use less of your credit
- Be wary of credit searches
- Avoid getting a CCJ
- Can you still get business finance with a bad credit score?
Check your report
The first thing you should do is look at your report. Your credit score is effectively a top-line summary of your report so it won’t tell you everything you need to know.
By looking at your report in more detail, you’ll be able to narrow down what might be negatively affecting your score.
You can check your business credit score online by signing up for an account with a credit reference agency (CRA).
The main CRAs in the UK are:
Some CRAs offer a free trial, but you’ll need to pay a monthly fee (usually around £30) for permanent access to your report.
Correct errors on your report
Your score might be low because of a simple error. This can range from an incorrect address to a debt or missed payment that doesn’t even exist!
According to Clearscore, some of the most common errors are:
- Missing financial or personal information
- Unrecognised details (either as a result of a mistake or fraud)
- Old or outdated information
Most credit reference agencies will allow you to make amendments to certain parts of your report. So spend some time each month going through your business’s credit report and make sure everything’s accurate.
Pay your bills on time
One of the surest ways you can improve your credit score is to make sure you’re being responsible with the credit your business already has access to. This means paying your debts on time.
Budget for the future carefully so you know you’ll have enough left over to pay your debts and invoices when they’re due.
Apply for business credit
One of the best things you can do to improve your personal credit score is to apply for a credit card and start using it (responsibly) – the same applies to your business. If you want to improve your credit score, you need to demonstrate that you can be trusted with credit in the first place.
A easy way to get started is to apply for a business credit card. These are usually easier to get than other forms of business finance.
Once you’ve been approved for a credit card, use it and pay it off on time. You will then build up a positive credit profile.
Open a business bank account
If you haven’t done so already, you should open a separate business bank account in your business’s name. Keeping your personal and business finances separate makes it easier for you to keep on top of your payments and also makes it simpler when you apply for finance.
Most lenders will ask to see your business bank statements, so you don’t want your personal transactions appearing on there too as it may give a false impression of your business’s situation.
Be aware that you will need to pay an annual fee for most business bank accounts. Some banks offer a free period for new businesses under a certain level of turnover.
Here’s a helpful guide to choosing a business bank account from Moneyfacts.
Take on a director with good credit
If you’re still struggling to get finance, you should consider taking on a director who already has a good personal credit score or who has a history of running successful, profitable businesses.
The presence of this director within your business can increase your chances of being approved for credit.
If you operate your business as a sole trader or a partnership, it doesn’t have a legal identity of its own. From the lender’s perspective, the business is the same as its owners, and your personal credit score will have more of an impact on their decision.
By incorporating, and forming a limited company or limited liability partnership, your business will have a legal personality of its own. Its financial activities will be considered to be distinct from yours and the other shareholders.
Your personal credit score will still be considered, but it might not have as much of an effect on the likelihood you’ll get approved.
For more information on choosing a legal structure for your business, read our guide.
File your accounts and tax returns on time
Make sure you file your annual accounts and tax returns on time to avoid affecting your credit score. If your business isn’t up-to-date with its records or taxes, this could be a sign that your business is struggling.
If you’re already set-up as a limited company or limited liability partnership, you’re legally obliged to submit annual accounts to Companies House. If you fail to do so, you’ll face an automatic penalty of up to £7,500.
You can read more about late filing penalties here.
Use less of your credit
One of the indicators credit reference agencies use to assess your creditworthiness is your credit utilisation rate.
Effectively this is a measure of how much of the credit you’ve been given you’re actually using. You can read more about how this works in our guide on credit scores.
Try to keep your business’s credit utilisation rate as low as you possibly can – ideally at 30% or lower.
Be wary of credit searches
When you apply for credit, a lender will usually search your credit history and pull your file so they can check it.
These searches fall into one of two types:
- Soft searches
- Hard searches
A soft search doesn’t show up on your credit report, however a hard search will. Hard searches are usually conducted after you apply for a loan or credit.
If there are a number of hard searches on your credit report over a short period of time, lenders might consider it to be a warning signal. It might be a sign that you’re desperately looking for credit and are therefore in financial difficulty.
Avoid getting a CCJ
A CCJ is a county court judgement. If a CCJ involves a monetary amount its recorded publicly on the statutory Register of Judgements, Order and Fines. Credit reference agencies can check this register to get a full picture of you and your company’s financial history.
If you don’t pay a CCJ within 30 days, it will remain on the register for six years, and can’t be removed even if you eventually pay it.
If you do become the subject of a CCJ, make sure you pay it as quickly as possible to reduce the impact it’ll have on your creditworthiness.
Can you still get business finance with a bad credit score?
It depends on the lender. At Boost Capital, we consider your credit history along with the overall health of your business. This means you don’t necessarily need to have a perfect credit report to get approved for a business loan.