Building Business Credit: Essential Steps to Establish and Improve Your Credit Score

Published 16 June 2022

In this article we will cover how you can build and improve your business credit profile which in turn generates your business credit score.  If you want to borrow money or arrange business credit facilities, then a good credit score is essential.

This article covers:

• How Does a Business Credit Score Work?
• What is a Business Credit Profile?
• Is a Business Credit File the Same as a Business Credit Score?
• Why Credit Check Your Own Business Credit Report?
• How to Check Your Business Credit File?
• What is a Business Credit Score?
• What Affects a Business Credit Score?
• Is a Business Credit Score Different To a Personal Credit Score?
• How to Establish Your Business Credit Score

How Does a Business Credit Score Work?

Credit reference agencies compile information about your financial history into a credit report and use it to generate a credit score, usually between 1-100 (100 being the best you can get).

Lenders look at your credit score and credit report from one or more CRAs before coming up with a credit rating, which is used when deciding whether to accept your credit application, such as for a credit card or loan.  It may also help them decide how much to offer you.

Businesses with a higher score are seen as lower risk, which means lenders are more likely to give them credit.

What is a Business Credit Profile?

A business credit profile, is also known as a business credit report or business credit file. Business credit reports are compiled by CRAs and show the current financial health and financial history of a business.

Each report will be different depending on which CRA has compiled it, but  is likely to include the following:

• The basic details of your business – address, how old it is, who is in charge
• Your current debts.
• How much you have already paid off, and how much you have left to repay.
• Your bank accounts and their statuses – active, not using anymore, in credit, overdrawn etc.
• Official records and filings – HMRC, Companies House, etc.

Is a Business Credit File the Same as a Business Credit Score?

Your credit reports and your credit scores are two different things.

• A credit report is a statement that has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts.
• Your credit scores are calculated based on the information in your credit report. Your credit score will go up or down depending on the financial health of  your business.

Why Credit Check Your Own Business Credit Report?

Anyone can buy a copy of your business credit report to help evaluate how risky it is to work with you. It is therefore a good idea to check your business credit reports regularly to keep an eye on the information lenders and service providers see when they purchase your report.

Having good business credit history and favorable business credit can mean the difference in whether your business is approved for a loan or gets better credit terms with a vendor.

Knowing what’s on your business credit reports also gives you the chance to dispute any errors that could dent your financial reputation.

• See what lenders see when making credit decisions about your business
• Find out the top factors influencing your score so you can understand any issues and start to fix them
• Ensure your report is correct and up-to-date

How to Check Your Business Credit File?

You can view or request your company credit file from various Credit Reference Agencies including:

• Experian
• Equifax
• TransUnion
• Dunn & Bradstreet

What is a Business Credit Score?

A credit score is a tool used by lenders to work out whether you qualify for credit.  The score represents the credit history of your business, and helps to show how you will manage repayments. The score usually ranges from 0 to 100, and you should aim to have as high a value as possible. This tells lenders that the risk is lower when offering you credit.

What Affects a Business Credit Score?

It’s important to note that the factors affecting your credit score vary depending on which credit reporting agency (CRA) or lender you use. This means that their calculations will vary too, so you might get a different credit score from each CRA.

Your score will reflect factors such as:

• Whether your business is registered with Companies House or not
• Your credit providers
• Information the Registry Trust holds on you, for example any County Court Judgements (CCJs)
• Your credit history

Your score will determine:

• how much you can borrow
• your interest rate
• whether you’ll be approved for a loan at all

Is a Business Credit Score Different To a Personal Credit Score?

Yes, the two scores are separate and they measure different things. Your personal credit score measures your ability to pay back a debt, and a business credit score looks at the ability of your company to do so.

In the UK, you’ll have two separate credit files – one for you as a consumer, and another for your company. However, if you’re a start-up or a small business with less than three directors, lenders might use tools that combine both your personal and business credit score. They’ll do this where a company has little or no financial history to check against, so personal data is used to build an accurate picture. With this in mind, it’s important for business owners to take care of both their personal and business credit scores.

How to Establish Your Business Credit Score

For any new business it is important to establish good credit in the first couple of years, in order to finance and grow the business.

It can feel a bit ‘chicken and egg’ –  you need credit first so that you can grow the business but you can’t get credit without a good credit history!

There are a number of steps you can take to get your new business off to the best start and to ensure you grow your credit rating:

Establish Your Business as a Separate Entity

Ideally, business owners think about credit before they start a company. That’s because a business’s structure can affect how lenders or potential business partners judge its credit outlook. Corporations and Limited Liability Corporations (LLCs) exist as independent entities and, generally speaking, are blank slates when it comes to establishing initial business credit scores and ratings. This separation of owner and enterprise is often the best approach when looking to establish your business credit.

On the other hand, a sole proprietorship permanently links your personal credit with the business’s credibility. As a result, lenders and potential business partners can rely on your personal credit score to judge the business. Both past and future oversights on your personal accounts can affect financing or contracting opportunities for the company.

Keep Your Company Details Up-to-Date

Keep your essential info up to date on official databases, Companies House, and with your suppliers.

Keep your customers, suppliers, Companies House and business directories updated with any changes to your location or business status. Outdated or inconsistent information makes your business seem unreliable.

Open a Business Bank Account

In the interest of establishing your business’s independent identity, you’ll want to use a business bank account for company purposes. A business account can also help you build a track record with the bank. If and when you do apply for credit, you’ll come to them as an existing customer.

Pay On-Time

Lenders want to know that they’ll get a return on their investment, and potential business partners want to know that you’re reliable. Your business should strive to make all payments on time (or early) in order to help avoid the appearance of financial stress on your business credit profile. Failure to pay creditors can lead them to submit negative reports to the business credit agencies. A history of delays or defaults can damage your ability to obtain credit or prove your credibility to another company.

Paying your suppliers on time isn’t just good business practice, it’s also great for your credit rating as it clearly shows that you will pay your bills on time; even to the bank in the future

Try to pay your invoices on time wherever possible. Payment terms are a form of credit, so your credit rating will be negatively affected if you don’t do this.

File Your Accounts On Time

It’s important to submit your accounts and returns by the deadline. If you’re late in filing these, it can be a sign to lenders that you’re facing financial problems.

Lenders might not lend money to businesses who are registered, but do not file their accounts. Late filing in itself is often assumed to be a sign of financial difficulty

Make Use of Credit

If you do have access to credit, do you make use of this. Showing regular and responsible usage will be contributing towards and building that credit score which in time will enable you to borrow increasing amounts.

Limit Applications For Credit

Try not to make too many credit applications against your business in a short period of time, as this suggests to lenders that you’re struggling to secure funding.

Ask For a Quote

If you need to apply for business finance, ask for a ‘quotation’ instead. This is a simple solution that helps to limit the number of credit applications you make.

Keep Track of Customers and Suppliers

Keep track of the credit position of your customers and suppliers, as this can also affect you. Using this information, you’ll be able to limit the damage to your business if one of them goes into administration.

Monitor Your Business Credit Scores and Ratings

Building your business credit file isn’t a one-and-done operation. New information can negatively or positively affect your scores and ratings.

In order to help avoid unpleasant surprises, business owners should regularly check their company’s scores with a service like Dun & Bradstreet’s Credit Monitor.

Building your small business’s credit scores and ratings isn’t something that can be done overnight. Responsible business owners should work to establish and maintain reputable scores to help put their best foot forward when a lender or potential business partner pulls their business credit report.