If you have recently been denied a small business loan, it may be because you have a poor company or personal credit rating. Whilst a bad credit score does not always impede a company’s ability to raise capital, a good credit score can certainly make it easier to secure funding.
High street banks and traditional lenders are usually unwilling to grant funding to businesses with a history of county court judgements (CCJs), non-payment of loans or late credit card payments. Whilst lenders in the growing alternative finance sector are generally more flexible on loan eligibility, it is still important that companies present the best credit score possible when applying for funding, as it might allow them to qualify for a lower interest rate and thus lessen the total cost of their loan.
With this in mind, here are some top tips on how to improve your company’s credit score.
Audit your credit report
To monitor and tackle any problems early on, it is important to regularly review your credit rating by purchasing credit reports.
Credit reports are compiled by credit reference agencies, and are based on data available in the public domain about your business. Using this data, these reports make a recommendation on the probability of a loan being paid back on time.
When assessing these reports, it is important to pay attention to items in the ‘negative’ category and to look out for signs of outdated information, business fraud or identity theft. It is worth noting that each credit bureau has a unique formula for calculating scores, and each lender will look at different types of data. As such, maintaining several of these online credit reports will prove beneficial for your business.
Think carefully about when you apply for credit
Each credit application you file will be noted on your credit report, even if these applications are unsuccessful. Therefore, each time you are rejected for a loan, it could be damaging your credit history. Lenders will often be put off if a business intends to rely solely on financial credit. You will want to consider this before applying.
Credit agencies also take into account the difference between your current assets and liabilities, so having a positive cash flow will contribute to a higher credit score. If you’ve got a good cash flow, then you will most likely be dubbed a more ‘creditworthy’ business.
Focus on paying creditors on time or early
To show you are a sensible borrower, try to make repayments on time and pay your accounts off early. Whilst each credit agency crunches their numbers differently, all will consider your credit repayment history. The longer the positive credit history, the more you stack the odds in your favour, so the sooner you adopt the habit of prompt payments, the better.
Credit utilisation is also taken into account when applying for credit, so avoid maxing your card to the limit or using more than 70% of the funds available in your account.
Credit scoring agencies will often compensate for a dearth of information by contacting your suppliers, so try to ensure you pay them on time too. Not only is this beneficial for maintaining good business relationships, but it will ensure that you get a good reference when you go searching for finance.
Use lenders that report to credit reference agencies
A good payment history can boost your business credit if your lender reports to credit bureaus. Banks tend to report to credit agencies, but if you have poor credit then it will be difficult to secure this type of loan. Whilst there are several other finance options available for your business, it is worth enquiring as to whether they report to credit agencies in advance.
Be wary of county court judgments
You may get a county court judgement (CCJ) or high court judgement if someone takes court action against you for money they believe you owe them. If you do get a CCJ registered against you, settle it within 28 days to ensure that the judgement is cancelled and will not appear on your record. Unpaid county court judgements can appear on your register for up to six years, so avoid this at all cost.
The bottom line
Building good business credit should help you attain a lower-interest small business loan or business credit card, not to mention better terms from suppliers. If you prove yourself trustworthy, it might even attract new customers to your business, given the public nature of business credit scores.
In an increasingly tech-dominated world, small businesses have a wide range of financial options available to them, particularly from non-traditional finance providers. Alternative lenders such as Fleximize offer a less bureaucratic, more efficient process, so SMEs can get funded quicker. They also take a more flexible approach to lending, often looking beyond a company’s credit history and trying to find a way to say ‘yes’ to every application.
However, it’s worth remembering that your company and personal credit scores are still assessed, so you’ll need to get them in shape before applying for funding.
Peter Tuvey is co-founder and managing partner of Fleximize.