Credit scores have long been used as a barometer for overall financial health, but two in three SME owners don’t check their credit report, according to Experian research.
Why do credit scores matter, and why are so many business owners ignoring their scores?
According to Experian SME MD Ade Potts, good credit lines can be vital lifeblood for SMEs, which is why Experian launched a free service for businesses to check their credit score within CreditMatcher, a comparison service that lets people shop around for credit without it damaging their score. “One of the main advantages of knowing your Experian Credit Score is that you will see what lenders are likely to think of your personal creditworthiness. Lenders can take company directors’ personal credit histories into account when little information is available on a new business,” she says.
Each time individuals and even businesses apply for credit, a hard search is recorded on their credit report. Multiple applications can damage the score and are visible to potential lenders, who may view these as a negative factor when assessing applications.
CreditMatcher leaves a soft search which lenders cannot see. So searching and comparing credit products doesn’t affect creditworthiness in any way.
Does location matter?
Experian data shows that areas with a high number of start-ups tend to have the lowest average business credit scores, such as London and the South East, and Warrington in the North West. Why is this the case?
“Start-ups are only at the beginning of their life and so information on them can be hard to come by,” says Potts. “It can be difficult to build up a profile of a business before they have submitted accounts, or applied for and repaid credit in the past. As these businesses mature and more becomes known about them, their credit file can grow by adopting good business practices. In turn, this will help the postcode or region’s average score to increase.”
While this may be the case, some areas in the country are more likely to be home to start-ups, whether it’s because they have access to technical capability from experienced staff, access to transport links or suppliers, or the affordable living and office rental costs. “Additionally, just being closer to finance centres and areas with a high number of associated service businesses can be helpful in making all the factors ‘just right’ when a business is founded,” Potts explains. “The reason for seeing some of the low score clusters could be aligned to the nature of those businesses, their age and revenue cycles.”
What does a low credit score mean?
Other businesses, whether suppliers, customers, or credit lenders like banks or credit card providers, want to know that the businesses they lend or extend credit to are reliable and will pay their bills on time, which, according to Potts is best identified by a business’s credit score. “The biggest indication of a business’s likelihood to do that is their credit score, as it collates a number of risk-based factors into a score that can be accessed by any other business you may have a relationship with. A low score means it is more difficult for a business to access the credit it needs when it wants to grow,” she says. Additionally, other businesses may decide not to work with companies with low credit scores if they are concerned they will not get paid for their services.
Improving business credit scores
Managing a business credit score relies on similar good habits to building a positive personal credit history, says Potts.
Potts believes that new businesses in particular should make sure their information is kept up to date with a key credit agency. “At the same time, find out what our score actually is with them right now and if there are any negative factors currently impacting it. Knowing your score is always the first step to improving it,” she adds.
Always ensure you are making payments on time, as this is key to seeing your business credit score rise. Setting up direct debits for regular payments, as you would in your personal life, is one way to manage this.
Make a concerted effort to pay all suppliers and invoices on time, as these are often reported to credit reference agencies, and a worsening payment trend is a key indicator of deteriorating cash flow.
“Your business credit score is made up of publicly accessible data such as County Court Judgments and information from current account providers, credit card companies and other trade credit providers,” Potts says. The only way to improve it, is to keep on top of all these factors.”