How to Improve Your Business Credit Score

Every business has a credit score, which tells lenders and suppliers how good you are at paying debts. Find out how to use credit scores to your advantage, and how to keep yours healthy.

What does a business credit score say?

A good credit score means that you pay your bills promptly and if you do that your suppliers will be happy to do business with you.

  • Suppliers will probably give you more favourable payment terms.
  • Lenders will give you better access to credit and capital.

You can apply the same logic to the businesses you deal with. If they have a good credit score, you know that they will probably pay your invoices on time. Ensure that you check their credit score before signing any contracts with them.

Conversely, if you don't pay your bills on time and constantly have to be chased up then your credit rating will suffer. And if your suppliers have a history of late payment their credit score will also be affected.

How are business credit scores worked out?

Many companies create credit scores and they each have their own proprietary system for doing it. This means that your business will have several credit scores and you will not know how any of them were calculated. However, there are some basic criteria and rules that are followed in developing all credit scores and it is important that you understand them.

  • Most credit scoring companies are linked to debt collection services, so they know who does and who does not pay their bills.
  • They gather publicly available information about your business from government departments and banks.
  • Be aware that you could be reported to a credit scoring company by somebody who is not satisfied with how quickly you settle your bills.

Your credit score might be on a scale of 1–5 or 1–100. The higher your score, the better you are at paying.

How to score well

OK, so how on earth do you go about improving your business credit score when you don’t really know all the things that go towards it? Here are some of our tips that will help to ensure your business is not red-flagged to lenders or other businesses.

Review your business credit score on a regular basis

If your rating falls, contact the credit scoring company immediately to find out why - they are legally obliged to tell you why.

It could be because of any of the following reasons:

  • they have made a genuine mistake - if that is the case, you are entitled to have your score corrected
  • a vendor reported you for withholding payments for legitimate reasons such as invoice disputes – again, you can get this corrected.

What is a good business credit score?

Your credit score doesn’t need to be a four out of five, or 75 out of 100 – so don’t worry about a few points here and there. Most businesses will be happy to work with you so long as you’re not in the bottom quarter.

Pay on time

Most of your business credit score will be influenced by on-time payments.

  • Set up a good accounts payable system so that you know when your bills are due.
  • Use accounting software to automate payments - by doing so, it means that you will not forget.
  • Keep an eye on cash flow,so you can see if you’re going to struggle to make payments.
  • Be aware that big companies and utilities are more likely to report you for late payment.

Don't hide cash flow problems

It stands to reason that almost every business will struggle with cash flow or even run out of money from time to time. If it’s affecting your ability to pay bills, don't bury your head in the sand. Contact the people you owe money to and explain the situation to them. If you have kept them in the picture they are unlikely to report you to a credit scoring company if you explain why you are going to be making a late payment and tell them when you will be able to pay your bill.

Dealing with business that have a poor credit score

Credit scores work both ways. You can use them to protect your business from bad debts, too. Check out the credit score of clients new and old, and take steps to control risk.

Know what a poor business credit score is

When you start keeping track of your credit score, you will quickly discover just how hard it is to get a really good one. Try and keep some perspective when reviewing the scores of the businesses you deal with.

Don’t worry if a business has a middle-of-the-road credit score. Just be wary if they’re in the bottom quarter of the scale.

If you find that an existing client has a poor credit score, don’t panic. Your personal experience of them is what really counts. You only need to worry if their score is trending consistently downward.

Set cautious invoice payment terms for higher-risk businesses

You don’t need to turn away businesses with bad credit scores. You can still do a deal, but it makes sense to structure the agreement differently.

Set shorter due dates so that you are not extending them as much credit.

Ask them for an upfront deposit.

Charge them interest or a late payment processing fee when invoices are past due.

Reduce your dependence on late payers

Businesses that consistently pay late will put you under cash flow pressure and could even threaten the very future of your business by diminishing your ability to pay bills on time, and that will affect your credit score. Ensure that you are not overly dependent upon businesses that keep you waiting. Gradually try to cycle late-paying clients out of your business.

Manage your cash flow

There is no getting away from it - much of your credit score will come down to your cash flow. If you run out of money, you will miss payment deadlines and your credit score will suffer.

You’ll take a great deal of pressure off yourself if you are paid on time. Definitely think about your invoice payment terms and look at how online accounting can help you stay on top of accounts receivable.

Try to be strategic about when you spend money. Consider setting rules around how low you allow your bank balance to get. Accountants etc. can help you decide what makes sense for your business.

Look after your credit score

The calculations behind credit scores are complex. However, the basic principles of protecting your business credit score are not. Pay your suppliers on time by making sure you keep a reasonable cash reserve in your business. Making sure you get paid on time will also help. Good invoicing systems and accounts payable practices are vital to all this.

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