Building business credit: how your account activity affects future financing
We all know about the importance of a good credit rating in our personal lives, but did you know that you should be paying attention to your business credit score, too?
Your business credit rating can be vital when you want to scale up. Here's what you need to know.
Business credit matters more than you think
A business credit score is just like a personal credit score, except your business is being assessed, rather than you. Essentially, it shows how safe your business is perceived when it comes to loans, on a scale of 1 to 100. If you can keep your score above 80, your business is considered to be low risk, which increases the chances of financing companies lending you money.
Many small business owners never even think about their business credit score. In fact, a huge number don't even realise that it exists. When you're running a very small business, it may not seem important. However, growing your business often means borrowing money, and a low business credit score can lead to being turned down for loans.
How business credit works in the UK
There's no single organisation that judges business credit. Instead, different credit reference agencies make their own assessments. Companies like Experian, Equifax, Creditsafe and Dun & Bradstreet are all credit assessors. Each agency has its own specific criteria. However, they all base their assessments on common financial factors. As such, your credit score may vary slightly from one agency to another, but very large discrepancies are unlikely.
Factors that affect your creditworthiness include:
Your business's history of paying bills on time (or not)
Your business overdraft history
Your history of filing accounts with HMRC and Companies House
Your business's existing credit
How many applications for finance your business has already made
That last item on the list can cause problems. Making too many applications is seen as a red flag but, on the other hand, if your business has never borrowed money before, you may find it hard to get business loan approval. With no history of borrowing, companies don't have any way of deciding how reliable you are at paying back loans. This can create a catch-22 where you initially get turned down for loans due to a lack of credit history, then get turned down because of unsuccessful loan applications.
How your bank account activity impacts your score
Your business credit is like a financial CV, and you build it every day. People often ask if their business bank account affects their credit score, and the answer is yes. Whenever you use your business bank account, you're adding data, which credit assessors can access. Your business bank account gives them an idea of your operating cash flow and how you manage it, which is crucial for building a credit picture.
Credit agencies may look at the frequency of your transactions. A healthy business bank account has regular transactions and does not see payments bouncing or being returned. They'll also examine your overdraft. To be clear, going into your overdraft is not a crime when it comes to your business credit rating, but exceeding its limits is a huge red flag, and remaining overdrawn for long periods of time can also cause issues.
When you're just starting out in business, you may have very little bank account history. This can cause problems; generally, credit agencies want to see a history of regular transactions, completed payments, and so on. If they only have a couple of months of data to work with, they're likely to give you a low score for now.
Simple steps to build credit from day one
You may not even consider building business credit when you first start your business. After all, you've got enough on your plate. However, it's a good idea to adopt sound financial practices from the very beginning. Even if you think you'll never need a business loan, who knows what the future holds? A good credit rating will certainly never hurt you.
To start, you should open a business account and actively use it. A key part of building business credit is keeping your personal and business finances separate. This allows credit agencies to accurately assess your business's creditworthiness, without personal finances muddying the waters.
Be sure to pay all your suppliers on time. To do this, you may need to manage your cash flow very carefully, especially when you're first starting out and don't have a lot of spare capital. When you're juggling lots of things in a busy restaurant, bakery, or retail location, it's easy to fall behind with your payments. Good pieces of accounting software will help – if you can manage your invoices and expenses, you're on your way to building a good business credit score. Remember, even small actions can have a big impact over time.
Finally, keep all your records updated at Companies House, and file everything on time with HMRC. Official records are usually the first port of call for credit agencies, and if yours are out of date, that may be viewed as a red flag.
How to get funding for your business
Of course, the goal of a good business credit rating is loan approval, something that will let you expand your fleet of food trucks or open a new café location. This is something that most ambitious small business owners will have to consider sooner or later, as they work on scaling up. Good credit opens doors to funding, partnerships, and better terms.
Just like with a personal credit rating, it's possible to check your business credit score. It's certainly worth doing this before you apply for any loans, as a failed loan application can affect your credit rating. Don't worry: there's a common misconception that checking your credit score will lower it. That's not true at all.
If you check your credit score and find that it's too low, you can and should take steps to improve it. But if you need alternative sources of funding right away, there are other places you can turn.
The SumUp Cash Advance offers small businesses access to a loan without credit checks. Your loan amount is not based on any pre-existing credit ratings; instead, it's based purely on your sales through SumUp. There are no hidden costs or interest involved. When you decide to go for a Cash Advance, you'll be shown a fixed, one-time fee, which will be added to your repayments. That's it: it's totally transparent, with no unpleasant surprises.
Small business owners who take out a SumUp Cash Advance will make payments automatically. SumUp automatically deducts a set percentage from sales you make through your card reader. Alternatively, you can choose to make a one-off repayment to settle the advance ahead of schedule.
SumUp’s Cash Advance can help you grow your business, but it also helps you grow your credit score. As we've seen, receiving loans and paying them back on time is an excellent way to build your business credit rating. As such, taking a Cash Advance now could open the door to traditional bank loans in the future, when you want to take your small business to the next level.
Why building credit before you need it matters
When you start building your credit rating from day one, you're ensuring your business has a solid foundation. It also means you won't be caught off-guard when you reach a point where you need a loan; because you've built good financial habits from the beginning, you won't have to scramble in a desperate attempt to improve your credit score in a hurry.
Waiting until you have a good business credit rating before you apply for a loan makes approval a lot more likely. It's not just about loan approval, either: with a high credit score, banks and loan providers will often offer you more favourable interest rates, larger loans and more options to choose from.
That's the obvious advantage of building a business credit rating, but there's another hidden benefit, too. You might be surprised to hear that it's not just banks and loan providers who check your credit rating. Other companies that you want to work with will often take a look at your business credit score as part of their due diligence. In many cases, suppliers are wary of working with businesses with low credit scores, due to perceived risk. When you first start out, you might find that some high-tier suppliers don't want to get involved with your business, or, if they do, they offer you unfavourable conditions. The higher your credit score, the better your relationships with suppliers will be.
