What is the best way to build business credit?

11 Apr 2022

Credit is the lifeblood of business, the oil that keeps the cogs turning, without which the economy would grind to a halt. Here, we'll discuss how to build a credit rating and put your business in the best position to secure finance.

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A healthy business credit history serves several essential functions. It can be used by your creditors and suppliers when your business is competing for tenders or when negotiating contracts. Most importantly, lenders can use it to inform decision-making on whether or not to offer your business lines of credit - influencing both credit limit and interest rates. That's why it's essential to leave credible financial footprints whenever and wherever you can.  

There are very few businesses that survive and thrive without credit. Unless you're a one-person enterprise supplying a service that incurs zero cost, you'll probably need credit for your company's progression. The information gathered by credit reference agencies means banks and other lenders can make informed, data-driven decisions when assessing credit applications to reduce the potential risk to themselves. 

What is a business credit score? 

A business credit score is the metric defining a business's creditworthiness. Including several factors, it is an essential tool that lenders use to understand your business's financial position and level of financial risk. Good credit scores and a sound business credit profile can guarantee approval for the best business loans, credit cards, and revolving credit facilities. It's not the only deciding factor determining your eligibility for credit, but it can influence a lender's decision. 

What is a business credit file? 

Your business credit file is a report generated by credit reference agencies (CRAs) that collate information on certain aspects of your business. The agencies gather information from your business creditors and allow other companies to search for data about your business creditworthiness for a fee.  

All businesses can check their credit score with one of the reporting agencies for a fee. Companies use several credit reporting agencies to track their credit reports, with many lenders creating their own lenders report to feedback to the agency's about their debtors' payment history. The main ones used in the UK are Dun Bradstreet, Equifax Business and Experian Business. 

Is my personal credit score separate from my business credit score?

The connection between your credit score and your business depends on the type of entity you trade as. If you're a sole proprietorship or trader running your business from home, your business activity will be linked to your personal credit history. 

Suppose you trade as a limited company with a registered office and business address separate from your home address. You will likely already have an established business credit file, so it's unlikely your score will be linked to your business.  

However, individual circumstances can vary, and any link depends on what (if any) security or guarantees you've given for previous credit. For example, if your bank placed a second charge on your home to give your business credit.  

What affects a business credit score?  

Like a personal credit score, your business credit score fluctuates as you continue to make financial transactions. Credit reference agencies will assess some aspects of your business when calculating your business credit score. 

  • Credit applications. When you apply for business credit, such as for a leased vehicle, the lender or business runs a credit check on you, which might reduce your score. 

  • Payment history. Making sure repayments are on time helps to improve a credit score. If you're slow to pay existing debts, this could negatively affect your business's rating. 

  • Length of time in business. Lenders generally consider a newer venture riskier because they haven't built up credibility and don't have the records to prove they've battled through many business and economic fortunes swings.  

  • Negative entries on a credit file; defaults, CCJs, insolvencies and bankruptcies can have a disastrous impact on your business credit score.

If you’re unsure your application for credit will be accepted, why not try our business loan calculator below to find out how much you could afford to borrow before beginning an application.

Business Loan Calculator

How can I ensure credit is referenced?

Building your business credit score is easy. Imagine you take out a £1000 loan and pay it back through direct debit instalments each month over a year. Or you take a business credit card with £1000 credit, use it to pay for general business items but clear the balance every month. These small repayments combined with an unblemished payment record will add to your business's credibility for paying its creditors and give you a much better chance of being accepted for larger loans and credit agreements.  

Steps to improve your business credit score 

  • If any information changes, such as moving a registered office or place of business, update it asap. Also, notify your suppliers and customers of any updates and Companies House. 

  • Share your company's information so credit reference agencies (CRAs) can confirm all the business's history and data.

  • Collaborate with suppliers who offer you credit. If you have a good working relationship with a supplier, why not ask them to provide positive feedback and share payment record data with CRAs? If they're a significant business, they should do this already. 

  • If you're a start-up or a relatively young business, there might not be much information on the firm, so it pays to ensure you have a healthy credit file at your home address. The lender might offer the business credit if the owner has a clean credit file.  

  • Only apply for credit when asked or necessary. It's tempting to explore the possible finance options available, but if you make several applications in a brief period, this could suggest that you're struggling or desperate to secure funding.  

  • Open a business bank account to keep up to date with debts; make any necessary repayments on time or early and ensure you’re paying your bills on time 

How can I check my business credit score?

You can regularly check your business credit score by signing up for alerts letting you know when your credit record changes. CRAs do make mistakes, or other firms can make errors, so, it's worth keeping an eye on your business credit file.  

Commercial lending brokers will testify that it's much easier to get loans for companies with high credit ratings and a strong history. Keeping your credit file healthy requires paying all your invoices before the due date, filing all statutory documents on time, and regularly checking with credit reference agencies to ensure no adverse information on your firm is entered in error. 

What can I do to improve my business credit rating?

If you haven’t done so already, you can start building your business credit by opening a dedicated business bank account. Once you have that, you can utilise our Funding Cloud technology to apply for a small business loan. Winner of the 2021 UK FinTech awards LendTech of the year, Funding Cloud validates your business profile and matches you with the funding industry’s largest lender network.

Our team of dedicated Business Finance Specialists are on hand to help you through the whole process, from application to money in the bank. Don’t delay; increase cash flow or kickstart those growth plans with business finance today.

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Vivek Seda
Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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