For many small business owners and entrepreneurs looking to grow their business, the process of getting credit such as a loan or credit card can be quite daunting. Yet a healthy credit line is a vital tool that many small businesses use to fund growth.
Deloitte research suggests that the total value of small business lending in the UK (for those businesses with fewer than 50 employees) in 2019 was approximately £24billion, with a further £6billion of latent credit demand in credit cards, overdrafts and unsecured loans. That’s £30 billion of lending being used to fund and fuel the business economy. Yet a quarter of all SMEs are worried they do not have enough funding to get through the coming months.
What is a business credit score?
If you apply for business credit, lenders will go through your company records with a fine-tooth comb to try and understand how creditworthy it is. And while each will likely have its own eligibility criteria, a good credit score will almost always be a top priority when it comes to assessing your credit application. That credit score holds valuable information about your business, not just for lenders and banks but for suppliers and investors too. It showcases your company's credit history and creditworthiness, and helps lenders and suppliers make informed decisions about how your business would be able to repay any debts.
This means that building and maintaining a good credit score is key to taking your business to the next level. In this guide, Cashplus explain what's considered a good business credit score and offer insight and tips on how to build one for your company and then improve it over time.
What's a good business credit score?
There is no universally accepted 'good credit score' range pointing to what your business should be aiming for. If you ask for a review of your business credit score, it's important to remember that not all Credit Reference Agencies will use the same scoring scale, so different agencies may give you different scores. Typically, they'll be based on a range of 0 to 100 where the higher the score, the better your credit rating.
Here's an approximate breakdown of what potential lenders might consider a good credit score when reviewing your loan application:
- 80+: A credit score of 80 and above is generally considered excellent and will most likely mean your loan application is successful. Such a high score can also give you other benefits like lower interest rates and better repayment terms, depending on the lender. It's important to remember though, that a good credit score isn't a guarantee of getting a loan – often, businesses with high credit scores will be subject to extra scrutiny to make sure everything is in order, depending on the size and type of credit you’re looking for.
- 40-80: Businesses seeking a loan should be aiming for a credit score above 40. Depending on where your credit score sits within this 40-80 range, a lender may also ask the Credit Reference Agency and/or the borrower for information showing annual company revenue, a rigorous record of all transactions and previous loans, as well as a history of growth. It’s these factors alongside your credit score that the lender will use to decide if your business is secure enough to lend to.
- 40 and under: Most business loans available on the market require a company credit score of at least 40 to qualify for the bulk of available lending. But other factors may help – strong business credentials or proof that your company is an established business may weigh in your favour when approaching lenders for a loan.
Ways to build your business credit score
Since 2017 all of the net growth in small business lending has come from smaller banks and alternative sources such as peer-to-peer (P2P) lenders rather than the bigger, better-known banks. But whenever you apply for business credit from a lender, no matter if they’re P2P or a giant high street bank, Credit Reference Agencies will provide that lender with any information they have about you.
This information will come from various sources. These include The Gazette and Registry of Judgements, Companies House, banks and financial institutions, and suppliers reporting on trade credit. These records help potential lenders understand your company’s overall financial situation better because credit scores are based on a multitude of factors that go far beyond a company’s ability to pay its bills on time.
There are several ways your company can positively influence the information lenders and suppliers receive and in doing so build a credit score that shows it to be financially stable and low risk to lend to:
- Make all your payments on time and according to the terms of the agreement you have in place (as we said, it's not all about paying bills but that is still a vital part of it)
- Try to avoid incurring any CCJs (county court judgements)
- Keep up-to-date records of your ownership details and a comprehensive list of all company accounts. It’s also important that you file these on time.
And don't forget, your business credit score will also be dependent on the amount of existing credit and outstanding debt your company carries, as well as the number of credit applications your company has filed for in the past.
Ways to improve your business credit score
Once your company has built a credit score, maintaining and trying to improve it should be high on your priority list as a business owner – and there are several things you can do to achieve that end.
The first and best way to keep your company a low-risk option for lenders is to continue making sure all its invoices and debt obligations are paid within the agreed terms and that you're submitting your accounts to Companies House in good time. Failing to meet these basic obligations may give lenders the impression your business is struggling, which will negatively affect its chances of getting a loan from a bank or credit from suppliers.
Another simple way to maintain your reputation as a reliable and trustworthy business is to make sure all your company details are up to date in the relevant places. This means updating Companies House records, as well as any suppliers or investors, if you make any significant changes to your business – for example moving address or setting up another location.
And when it comes to applying for a business loan or credit, be careful not to make too many applications to lots of lenders – especially close together. While that may sound counterintuitive, making lots of applications in a short period of time may make lenders think your business is in financial trouble or reliant on debt and thus a bigger lending risk, as they'll be concerned you won't be able to make your repayments on time and in full.
As pandemic restrictions have lifted and businesses need to grow, more businesses are returning to credit as a business tool. In the second quarter of 2021, 61% of small businesses using finance were borrowing more than they were pre pandemic, with 36% of those borrowing for the first time.
If you’re looking for credit and want to improve your business credit score, our Cashplus Business Extra Bank Account customers have access to our Business Creditbuilder.
Easy to use at no added cost, Business Creditbuilder works to improve your business credit score and improve your company’s credit standing with the Credit Reference Agencies. Simply sign up and we'll lend you the equivalent of 12 months of your Business Account fee (£108 in total), which you then repay in 12 monthly instalments exactly as you do your existing account fee – so it costs you nothing extra.
As you pay these monthly fees on time and in full for a year, we'll report your payments each month to the Credit Reference Agencies. This could help improve your business credit score and prove your reliability and security to potential lenders, thus improving your chances of getting a loan or credit.
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