What factors affect your business credit score?
Your business credit score is calculated based on several factors. The main factors include:
- Your payment history
- Age of credit
- Industry risk
- Number of financial applications
- Your company size (number of employees)
The most important factor is your payment history: has your business kept up with its repayments? Has your business ever missed a payment?
With most credit reporting agencies (CRAs), payment history is the main factor that is used to determine a business credit score.
Other variable factors include:
- Balances outstanding
- Payment habits
- Credit utilisation (the ratio of credit available to credit used)
- Trade credit you have secured
- Director information and details of ownership
As you can see, the extent of information that CRAs consider when they determine a business’s credit score is vast.
It’s also important to note that different CRAs use different metrics and final scoring systems when calculating a credit score. For example, Equifax uses a unique scoring system while Experian uses its own system.
Your business credit score may differ on different platforms, so it will be worth finding out which CRA any particular energy supplier uses (this is usually Experian or one of its two main rivals – Equifax and TransUnion).
What happens if you have a bad credit score?
When you are a limited company, energy suppliers will check your business credit score when you apply for a contract.
The reason they do this is to verify your business as legitimate and assess the financial risk of supplying you with energy. In other words, they want to make sure you will pay your bills – and a good credit score offers this reassurance.
When you have a bad credit score, three things can happen:
- You can have access to a smaller number of deals (suppliers can pull the best deals from under you if you are deemed high risk)
- You can have access to a smaller number of suppliers (some suppliers are unwelcoming to businesses with a bad credit score)
- You might be quoted higher energy prices (businesses with a bad credit score are charged higher rate because they are higher risk).
Ultimately, having a bad credit score will not affect your ability to get energy (you will still be able to switch) but your access to the best deals and suppliers will be restricted. You will be limited in choice and pay more for your energy.
How to improve your business’ credit score
There is no one-trick to improving your business credit score. It usually takes 6 months to take a “bad” credit score to an “average” credit score and the same again to take a “good” credit score to an “excellent” credit score.
Here’s what you can do to start improving yours:
Build up a history of good credit
The easiest way to build up good credit is to take out a business credit card and use it for purchases. So long as you pay back the balance in good time (most businesses do it immediately) then you will build up a good credit history very quickly.
Pay your invoices on time
Paying invoices late can negatively affect your business credit score. Payment terms are a form of credit and the company that invoiced you may report you for late payment. Late payment marks on a credit file stay there for several years.
Limit credit applications
When you apply for a credit card or loan, limit your credit applications to as few as possible (ideally 1) so few hard credit checks are performed. A hard check will show up in your credit history and negatively impact your credit score.
Establish trade credit with suppliers
If you can establish trade credit with your suppliers (where you buy goods now and pay later) this will build up a strong financial record over time so long as your suppliers (or you) share that information with credit agencies.
Dispute inaccurate records
If there are inaccurate records about your business you should dispute these. If the information a credit reporting agency holds is inaccurate, then they should correct it for you. You can also file a complaint with the ICO.
Be careful about which accounts you close
Closing the wrong credit account could harm your credit history. In general, it is best to leave unused accounts open to benefit from longer credit history and increase your total accessible credit in the case of credit cards.
Avoid future risk
If something may adversely affect your credit score in the future (e.g. taking out a short-term loan) you should avoid it. Anything that could sink your business credit score should be avoided, and especially things that signal financial stress.
What if my business doesn’t have a credit history?
If your business is new then it won’t have a credit history. This is normal. If your business is well-established and doesn’t have a credit history, or much of one, you should build one up so you can access better gas and electricity rates in the future.