The company credit score explained

A company credit score (more generally known as a ‘business credit score’) is a tool used by lenders, investors, and suppliers to determine a company’s creditworthiness and level of financial risk when it comes to paying debts. Scores can range from 0 to 100, with 0 being extremely high risk and 100 being very low risk.

This post explains why your company credit score is so important, how it is worked out, and whether it impacts your personal credit file. We also provide some simple tips for improving your score and increasing your chances of obtaining business credit.

The terms ‘company credit score’ and ‘business credit score’ are used interchangeably throughout this guide.

Why is my company credit score important?

A company credit score is a measure of creditworthiness and reliability determined by past behaviour. That is, how worthy the business is to receive financial credit, based on its history of paying debts and other bills in the past.

Every company has its own credit rating, just like every adult has a personal credit score. It’s an incredibly important piece of information, yet most business owners have only limited awareness of their company credit score. Some don’t even know that such a thing exists.

Before offering credit to your company, lenders and suppliers need to know how much of a risk they will be taking. The same is true of investors who may be considering buying shares in your company.

To determine the level of risk and make an informed decision, they will carry out a business credit check through a credit reference agency like Experian, Equifax, or Dun & Bradstreet. The agency will produce a detailed credit report, which will include your company credit score at that point in time.

Scores range from 0 to 100

Credit scores for companies usually range from 0 to 100, indicating the following levels of risk:

• Low risk – a score between 80 and 100
• Medium risk – a score between 50 and 79
• High risk – a score between 0 and 49

The higher the score, the more creditworthy your business – and the lower the risk to prospective lenders. Therefore, to have the best chance of obtaining credit or investment, your company credit score should be as close to 100 as possible.

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A good credit score demonstrates that your business is more likely to pay off its debts and make payments on time. As a result, it will be easier to get credit from a wider selection of lenders. You’ll also have access to more competitive interest rates and repayment terms.

Conversely, a poor credit score indicates that your company is not a reliable borrower. This may be due to consistently paying bills late or defaulting on loan repayments in the past. This type of score will make it difficult to obtain credit, because lenders will be concerned that you’ll struggle to manage repayments.

How is my company credit score worked out?

Credit scoring uses past behaviour to predict future behaviour. To determine your company credit score, credit reference agencies will look at a range of factors, including:

• Company size and how long it has been trading
• The industry your business operates in (some industries are riskier than others)
• Length/age of credit history (a longer track record is better)
• Payment history – what your company has borrowed in the past and whether debt repayments and bills are paid on time
• Amount of existing credit available to your company and how much it is currently using
• Number and frequency of previous finance applications – and whether they were approved or denied
• Trade credits (lines of credit from suppliers) that you’ve secured
• Accounts and tax returns filed by the company
• Details of company directors, shareholders, and other business associates
• Outstanding County Court Judgements (CCJs)

This information (where applicable) is included in a credit report, which gives lenders, suppliers, and investors a general idea of how trustworthy and reliable your company is when it comes to borrowing money and paying its bills.

As you can see, lots of criteria are taken into consideration. By and large, however, your company’s payment history has the biggest impact.

It’s also easier to achieve a higher score if your business has been around for a longer period of time and has a recorded history of borrowing.

New businesses often find it more difficult to obtain credit, simply because they have little to no credit history. In such instances, lenders may look at the personal credit scores of the business owners instead.

How to improve your business credit score – top 10 tips

Throughout your company’s lifetime, establishing and maintaining a good business credit rating is key to accessing the best range of finance options, low-interest loans, and investments from third parties.

Here are our top 10 tips for achieving a healthy credit score for your company:

1. Pay your business bills early or on time

This includes loan repayments, credit cards, rent or mortgage payments, business rates, utility bills, phone and broadband bills, lines of credit from suppliers, invoices, and direct debits.

2. Business banking

Open a business bank account with an overdraft facility and apply for a business credit card, ensuring that you stay within the credit limits and make payments on time.

3. Establish trade credit with suppliers

This is where you are given a line of credit and allowed to pay for goods or services at a later date. Not all suppliers automatically report trade credit, so it’s a good idea to ask if they will do this.

4. Use available credit regularly and responsibly

The more credit you have, the better your credit score, but only if you utilise the credit responsibly and make payments on time. Avoid maxing out your available business credit. Ideally, you should use no more than 30% of your available credit at any given time.

5. Monitor your company credit score

Keep up to date with your score by regularly checking your credit report. Look for changes, updates, and anomalies that could have an adverse effect on your score.

6. Limit credit applications

Try to avoid making multiple credit applications in a short period of time. This suggests to lenders that your business is struggling financially or finding it difficult to obtain credit. If you want to compare a number of finance options before deciding, ask for quotes instead. This will limit the number of credit applications registered on your report.

7. File annual accounts and tax returns on time

If you’re late filing these, it can indicate to lenders that you’re facing financial problems, or just generally disorganised (neither of which is a good look!)

8. Keep business details up to date

Ensure that your company details are correct and up to date at Companies House and HMRC, and with other third parties like customers, suppliers, service providers, banks, and lenders.

9. Monitor your customers’ and suppliers’ credit positions

This will help to minimise any potential risk or damage to your company if any of your customers or suppliers enter into administration.

10. Avoid County Court Judgments (CCJs)

No one actively tries to get a CCJ, but if you do get one, be sure to pay it on time.

Improving your company credit score takes time and involves many of the steps that you’d take to strengthen your personal credit score. Making financially sound decisions, establishing healthy payment habits from the start, and building positive relationships with suppliers will help immensely.

Difference between a personal credit score and a company credit score

Your personal (consumer) credit score and company (business) credit score are separate. The former is based on your personal financial history and measures your ability to pay back personal debts. The latter is based on your company’s financial history and measures its ability to pay back business debts.

Having a separate credit score is one of the many benefits of setting up a limited company. The company is classed as a legal person, which means that it can take out credit in its own name, is responsible for its own debts, and exists independently of its shareholders and directors.

Whereas, if you were to operate as a sole trader, lenders would use your personal credit score to determine the creditworthiness of the business. This is because there is no legal separation between the individual person and the business.

That being said, there are some situations where your personal credit score may be relevant to, or affected by, your company’s score. For example:

• A lender is unable to obtain sufficient information from your company’s credit report (e.g. if the company is new)
• You agree to act as a guarantor for a business loan
• You’re personally liable for business debts on account of being found guilty of wrongful or fraudulent trading

Therefore, as a company owner, it is important to take equally good care of your personal and business finances to ensure neither credit score is adversely affected by the other.

MoneySavingExpert offers detailed guidance on improving your personal credit score and explains how to check your personal credit report for free.

How to check your business credit score

You can check your business credit score and request a copy of your business credit file from most major credit reference agencies, including Experian, Equifax, Dun & Bradstreet, and Creditsafe. Most agencies offer an online service, but you may be charged a fee to access certain features.

By checking your credit report regularly, you will be able to see how lenders, suppliers, and customers view your business. It will help you to understand your company credit score and the factors influencing it – including the things you’re doing right and the things you need to improve.

Credit reference agencies also provide services whereby you can sign up to receive automatic alerts about significant changes to your company credit report. This enables you to keep up to date, identify errors, and respond quickly to any events that may negatively impact your score.

Wrapping up

Whether you’re applying for a business overdraft or credit card, requesting a line of credit from a supplier, or hoping to secure new commercial premises for your growing business – establishing a good company credit score is key.

A healthy score will make your business attractive to lenders and suppliers (and even investors), providing access to a wider range of credit with the most favourable interest rates and repayment terms.

But a good credit score doesn’t happen overnight. You need to manage your finances meticulously, as outlined earlier. Most notably, you should be paying all of your bills on time, obtaining lines of credit whilst keeping credit balances low, and establishing positive relationships with your suppliers.

However, if you need specialist help with your cash flow or business finances in general, we would advise speaking to a chartered accountant or business advisor. Your business banking team may also be able to help.

If you have any questions about this topic, please contact us or leave a comment below.