How to improve your business credit score

How to improve your business credit score step-by-step

Given how important your credit score can be for your chances of securing finance, time spent on improving it is usually well-spent.

It can feel like a daunting prospect – where do you start? How does it work? How can you improve it when you can’t borrow money in the first place?

There are a lot of questions to answer and confusions to clear up, so we’ve put together a step-by-step process for you to follow. 

1) Check your current credit score

You can’t embark on the journey without knowing where the starting line is. Knowing your current credit score is essential because it determines what the best next steps are. The process will be different if your score is 20 or 70, for example.

You can pay for credit checks or use one of the free options on the market, including:

• Experian 

• Creditsafe 

• Credit Passport

2) Correct errors on your credit report

After getting and reviewing your report, the first and easiest step you can take is to correct any errors.

Credit agencies can get things wrong or miss information, so if you’re seeing something that doesn’t look right, you can submit a notice of correction.

Errors to look for include:

• Whether your current address is correct. 

• Old or new bank accounts not being updated. 

• Some lenders do not report credit to agencies, so one or more of your credit products could be missing.

Reporting agencies have different methods for corrections, but most start with you submitting an initial contact form or email.

3) Establish and maintain good credit practices

Once you’ve corrected any mistakes in your report, you move into the long game of stabilising and improving your credit score.

There are no quick fixes from this point, just the steady work of good credit practice and the fullness of time.

3.1 Manage your use of credit 

This is all about not pushing your credit cards to their limit. Received wisdom (some would say conjecture) says that not using more than 30% of your allowed credit is best for your credit score, but we make no claim to that exact figure.

In pounds and pennies that means, if you had a credit limit of £100,000, you’d be spending and repaying £30,000 of it each month.

The basic tenet here is that you shouldn’t constantly be borrowing at your maximum limit. If you are, the implication is that you’re struggling to make ends meet and are too reliant on credit to keep your business funded.

If you’re in a position to reduce how much of your credit you use, this can be a good step towards improving your credit score.

Bear in mind that, according to Experian, your report can take 60 days to update with new data. If you’ve just taken out a new loan, you should wait one or two months before pursuing it as missing information.

3.2 Pay bills on time 

Missing a repayment is one of the worst things you can do to your credit score. It will be recorded on your report and, regardless of the reason for the missed payment, make you look unreliable and like you might struggle to repay your debts.

Understandably, lenders want to avoid businesses that don’t repay.

You can avoid late payments by setting up a direct debit to your lender. For credit cards, your direct debit could be for the minimum payment.

3.3 Submit full accounts to Companies House 

Your credit score is partly calculated by reviewing your financial records – looking at your debts, overall financial performance and changes year-over-year.

Micro or abbreviated accounts give an incomplete view of your finances and can make it harder for credit agencies to understand your story. As a result, your score could suffer for the lack of information.

3.4 Keep your bank account in order 

Banks report accounts which overdraw beyond an approved limit or where payments are rejected. To a lender, this can suggest you’re unable to manage your cashflow. To maintain a good profile of your bank account, always ensure funds are available for due payments and stay within your overdraft limits.

4) Manage your outstanding debts

If your debt load is causing issues with your credit score, it’s time to make a plan of attack. The commonly cited approach for paying down debt is to:

1. Make sure you’re making all the minimum payments required. 

2. Pay off the most expensive debt first. 

3. Where possible, consolidate your debts with a refinance or other credit product.

4. If you can’t and your remaining debts are on similar interest rates, then choose one of the following options:

a. Pay off the debt with the longest term to reduce your total interest repayments

b. Pay all of them off equally

c. Pay off the smallest debt in full first, then the second-smallest, then the third-smallest, creating a kind of snowball effect.

You don’t have to be debt-free – in fact, that could harm your credit score (lenders like to see some use of credit) – but reducing your debt load and, thus, your credit use should help your score.

5) Regularly monitor your business credit score

Keep tabs on whether your score is changing. It can get frustrating, especially when you feel like you’re doing everything right, but you want to get into the habit of checking your score each month or quarter.

You’ll be able to keep track of movement in either direction, as well as catching any mistakes as soon as they appear. A little proactivity can go a long way.

Five business credit score mistakes to avoid

As well as taking active steps to improve your credit score, you can also take some preventative steps by avoiding these common and painful mistakes.

1) Mixing personal and business finances

You might feel tempted to use your personal finances to support the business – especially if your personal credit score is comparatively better.

This is rarely a good decision. The costs to you, personally, can be enormous.  

• Businesses run a greater risk of insolvency than individuals. (Businesses become insolvent at 154% the rate of individuals – 55.8 per 10,000 vs. 21.9 per 10,000.) 

• It paints an inaccurate picture of your business’ finances, which can put off lenders and create difficult questions if your accounts are inspected closely. 

• Even if you don’t run into any issues, you’ll be building your own credit score and not your business’. 

2) Ignoring your business credit report 

You can’t manage what you don’t know – and what you don’t know can do a lot of damage!

Regularly reviewing your business credit report is the cornerstone of better business credit management. Without doing this, you’ll have no idea of whether your efforts are helping or hindering.

Set a monthly or quarterly appointment to review your credit report. Allow 30 to 60 minutes to download, review and plan some quick next steps.

3) Late or missed payments 

The cardinal sin of business credit, late payments are bad for business in all sorts of ways. A lender can see late payments as indicating: 

• You have cashflow issues

• You struggle to manage your finances

• You’re unreliable and might not fully repay your debt

Setting up direct debits is the easiest way to avoid late or missed payments. If you prefer not to do that, you could think about setting payment reminders in your calendar.

4) High credit use

We’ve covered high use previously, so we won’t go into as much detail here.

If you are spending close to your limit every month, it can reflect poorly on you. Using some, but not loads, of your credit each month is better from a lender’s perspective, as it suggests good financial management and lower risk.

5) Not establishing business credit early 

If you’ve been operating for several years but never used any credit products, you might have set yourself back a little.

The longer your history of good credit is, the better you appear. This is why we say that debt isn’t a dirty word – it’s an important part of your financial management.

Good practice with business credit is about walking the line of using just enough, at the right regularity, without reaching the outer edges of your credit.

Credit to you for wanting to improve your credit score

Like it or loathe it, your business has a credit score and it’s in your interests to optimise it.

Thankfully, as we hope this article has shown, making a positive impact on it shouldn’t take up a lot of your time. There are some simple steps you can follow to get the quick wins and a clear long-term strategy to put in place to make a sustained impact.

For many business owners, it’s only when they need to access more credit that they wish they’d improved their credit score. Get ahead of the game by establishing good credit behaviours and, in the future, you’ll be thanking yourself for the work you put in today.

And don’t forget: with an Allica Bank Business Rewards Account, you get a dedicated relationship manager to help you assess your borrowing options (among other things).

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Disclaimer: This is information – not financial advice or recommendation

The content and materials featured in this article are for your information and education only, and are not intended to take into consideration any particular recipients’ financial situation. The product details and interest rates referred to are correct at the time of writing.

The information does not constitute financial advice or recommendation and should not be considered as such. Allica Bank will not accept any liability for any loss, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.