Understanding Credit Scores for SMEs

What is a Business Credit Score?

There are lots of ways you can tell the health of a small business, one of those being your company’s credit score.

A business credit score is a vital indicator of a company’s financial health and a crucial tool for any small or medium-sized enterprise (SME) in the UK. Much like a personal credit score, a business credit score is simply a representation of your creditworthiness.

This score informs lenders, suppliers and potential partners about the reliability with which your business manages its financial obligations. Unlike some other figures, a credit score is a quick and objective measure of the risk someone would take on if they choose to lend to you.

The score typically ranges from 0 to 100, with a higher score indicating a lower risk and a more reliable financial position. For example, if you had multiple lines of credit with suppliers that you always pay on time, your credit score would be much higher than that of another company that frequently misses payments.

Having a good credit score is an essential thing for SMEs as it can help unlock growth opportunities, secure better terms with suppliers and build a foundation of trust in the market. 

In this article, we’ll take you through how credit scores work and how you can improve yours.

 

Business Credit Scores vs Personal Credit Scores

While they serve a similar purpose, business and personal credit scores are two very different things. 

A personal credit score is tied to your individual financial history, including personal loans, credit cards and mortgage payments. A business credit score, on the other hand, is based on a company’s financial records, including its payment history with suppliers, outstanding debts and filings with Companies House.

SMEs, especially sole traders and partnerships, often have their business and personal finances intertwined, but they should always be kept separate if possible.

Separating your business and personal credit scores not only protects your personal assets from business liabilities but also allows you to build a credit history for your company that isn’t just tied to your own finances. 

 

The Importance of a Healthy Credit Score

Your business’s credit score isn’t just a number; it’s a tool that can help fuel your business’s future and secure its success in the long run. The better your credit score, the higher the chances of better financial opportunities coming your way.

Here are just some of the reasons why your credit score is so important:

1. Better borrowing rates: When lenders see that you have a high credit score, it signals to them that you’re a low-risk borrower. This means they are more likely to give you favourable interest rates on loans, overdrafts and other forms of financing.
2. Better supplier terms: Most suppliers will check your credit score before agreeing to do business with you. A good score can lead to better payment terms, such as longer payment periods or higher credit limits.
3. Lower costs for business insurance: Some insurance providers may use your business credit score to assess risk and determine your premiums. With a better score, they may lower your costs.
4. Opportunities for growth: A good credit score can open doors to new opportunities like securing larger contracts.

Factors That Influence Your Credit Score

Building and maintaining a healthy business credit score isn’t just something that happens overnight; it takes work.

Here are some of the key factors that are taken into consideration when calculating your score:

1. Payment history: This is arguably the most critical factor. Consistently paying your bills, invoices and loan repayments on time demonstrates reliability and significantly boosts your score. Late or missed payments, even to suppliers, can have a severe negative impact.
2. Outstanding debts and credit: The amount of debt your business holds, and its credit utilisation ratio (the amount of credit you’re using compared to your available credit limit), is important. A high utilisation ratio can signal financial strain and may lower your score.
3. Financial filings: For limited companies, you must make sure you’re filing your accounts with Companies House on time and accurately. 
4. Legal issues: If your company has any outstanding legal notices or judgments against it, such as insolvency, it can severely damage your credit score.
5. Credit search activity: If you have applied for multiple lines of credit over a short space of time, it may show signs of financial distress and ruin your credit score. If you do need to do this, be strategic with your applications.

How Credit Scores Impact SME Financing

When you’re looking for funding, your business credit score is one of the first things a lender will check. It’s a quick and powerful way for them to assess the risk of lending to your company, and it directly impacts what finance options are available to you.

If your business has a high credit score, you’re in a great position. Lenders see you as a low-risk borrower, which means you’ll likely have access to a wider range of finance products, including traditional bank loans, with competitive interest rates. 

On the flip side, a low business credit score can be a real roadblock. It signals a higher risk to lenders, making it tough to secure funding from traditional banks. You might find yourself facing more scrutiny, higher interest rates or even outright rejections. 

At 365 Finance, we know that a credit score doesn’t tell the whole story. That’s why we specialise in alternative finance options like revenue-based finance. We don’t just look at a number on a report. Instead, we focus on your business’s recent turnover, cash flow and card terminal sales. This flexible approach means we can provide a lifeline for SMEs with a poor or non-existent credit score, giving you access to the capital you need to grow without being penalised for past financial challenges.

How to Check Your Credit Score

It’s a smart move to keep an eye on your business credit score. Regularly checking it helps you stay on top of your financial health, catch any mistakes, and make sure your information is accurate.

You can check your score with major UK credit agencies like Experian, Equifax, and Dun & Bradstreet. Each one might give you a slightly different score, so it’s a good idea to check with a few. Most offer free statutory reports, but you can also pay for more detailed insights. Just provide your company name and number, and you’ll get a clear picture of where your business stands. A quick check of your own score is a ‘soft search’ and won’t affect it at all.

How to Improve Your Credit Score

Building a healthy business credit score takes a bit of discipline. Here’s how you can take control and build a stronger financial foundation for your business.

• Pay on time, every time: This is the most important step. Make sure you pay all your bills and invoices on or before their due dates. 
• Manage your debt wisely: Keep your debt levels low. If you have a business credit card, avoid maxing it out. A low credit utilisation ratio tells lenders you’re managing your finances responsibly.
• File accounts promptly: For limited companies, filing your annual accounts with Companies House on time is a must. It shows transparency and positively impacts your score.
• Separate business and personal finances: If you haven’t already, open a dedicated business bank account. This creates a clear financial history for your company and is a foundational step in building a strong, independent credit score for your business.
• Regularly review your report: Check your business credit report for any inaccuracies. If you find a mistake, like a misreported payment, contact the credit agency to have it corrected.

Common Credit Score Myths

Let’s get the facts straight on a few common myths about business credit.

• Myth: Small businesses don’t need a score.
  • Fact: Every business can benefit from a good score. It opens doors to better finance options and stronger supplier deals, no matter your size.
• Myth: My high personal score is all I need.
  • Fact: While your personal score might be considered for a new business, a distinct credit score for business is what lenders and suppliers will primarily look at.
• Myth: Checking my score will lower it
  • Fact: This is one of the biggest myths. A ‘soft search’ to check your own score has no impact. Only a ‘hard search’ from a lender as part of an application can temporarily affect it.

Final Thoughts

Your business credit score is more than just a number; it’s a powerful tool for building a stronger, more successful company. 

While a great score is a huge advantage, we know that every business faces challenges. 

If your score isn’t where you want it to be, or if you’re a new business without a credit history, it doesn’t mean you’re out of options. 

At 365 Finance, we look at more than just a number. We focus on your business’s cash flow and turnover to provide flexible solutions like revenue-based finance and merchant cash advances. 

We’re here to help you turn your financial challenges into opportunities.

At 365 Finance, we can offer revenue-based funding of £10,000 to £500,000 in capital, so your business can thrive all year round. Apply for funding today without affecting your credit score. Or speak to our team to find out how we can help your business. To find out more, head to our website.