The Importance of Business Credit Scores for UK Businesses

The importance of your business credit score can’t be overstated. Your company’s credit score can be a major factor in your business being able to access business finance, agree trade credit and build relationships with investors, banks and lenders. 

But how is your business credit score measured? And how does this metric impact on your ability to apply for business loans and credit facilities?

What is a business credit score and why does it matter?

Your business credit score is a measurement of your creditworthiness, as assessed by the major credit rating agencies (CRAs). This score reflects your company's financial reliability and your risk level as a borrower, based on the company’s credit history.

In short, it’s a metric that shows how risky you are to lend to.  

Why is having a good business credit score so important?

Lenders, insurers and suppliers all want to assess the potential risk before offering your company any credit, financing or insurance contracts. 

Lenders, for example, want to know that you have the financial ability to repay any loan offered to you. To check this, banks, lenders and finance providers will look at your business credit score.

It’s a risk rating that takes into account your payment history, cash flow position, trading history and a number of other factors. The higher your risk, the lower your business credit score will be – and the more difficult it will be to borrow money.

How is a business credit score different from your personal credit score?

Your business credit score and your personal credit score (as a director) are two distinct and separate metrics. 

Let’s look at what makes them different:

• Your personal credit score measures your creditworthiness as an individual. It’s assessed by looking at your personal spending, use of credit cards and the way you utilise credit in your private life. 
• Your business credit score is a rating of your company’s creditworthiness, as a separate legal entity to you as an individual. It takes into account your business payment history, credit history and utilisation. Generally speaking, your personal credit score isn’t factored into your business credit score.

However, in some specific circumstances, your personal credit score may be factored in when applying for finance. This is especially true if you’re the director of a start-up or a business with limited trading and payment history.

How does a business credit score affect loan approvals?

Having a good business credit score can improve your chances of getting approved for loans and may unlock better interest rates.

A high score indicates to the lender that you’re a low-risk proposition. This is vital when applying for finance. A strong score gives the bank or finance provider confidence in your ability to meet the loan repayments and clear your debt. 

A poor or limited score can restrict your borrowing options, or result in higher interest rates and overall loan costs. If the CRAs assess you as being ‘high risk’, this is a red flag for lenders and they may refuse your application, or limit what you can borrow. 

In an ideal world, you should aim to proactively build your credit score and position your company as a low-risk, profitable and viable borrower. 

How a strong business credit score helps secure better financing

Lenders use credit scores to evaluate repayment risk. In other words, it’s a measurement of how likely you are to either repay or default on the loan.

No bank or lender wants to loan money to a business that may default on a loan. So lenders look for a strong credit score that can give them confidence in you as a borrower. 

A good score can mean:

• Higher credit limits: The better your score, the more assurance the bank has that you can repay the loan. This can lead to higher credit limits, larger loan amounts and more capital in the bank to invest in your business. 
• Lower interest rates: For the same reasons, lenders will offer lower interest rates when you can demonstrate a strong credit score. This makes the overall cost of the loan smaller and reduces the repayment amounts you will pay.
• Faster approval processes: All loans go through a complex approval process, where your business credit score is a major factor in the end result. A high score and a low-risk rating will tend to speed up the approval process.

Big banks will usually have a clear focus on business credit scores when reviewing a loan application. A poor credit score could become a major obstacle when approaching large banks and traditional lenders.

The newer breed of flexible business lenders, like iwoca, will still review your credit rating, but will also factor in other elements. These can include your revenue potential, future cash flow forecasts and the overall viability and profitability of the business.

What are the key factors that impact your business credit score?

We’ve seen how important your business credit score is to your borrowing potential. But what are the main elements that affect and influence your credit score?

Let’s look at the factors that can directly affect your score:

• Payment history: How quickly you pay your suppliers and creditors is a significant factor in deciding your risk rating. Late or missed payments are an indication of poor financial management, low cash flow, or an inability to meet a payment schedule – a major red flag to the CRAs.
  
  
• Credit utilisation and total debt: If you go right up to the top of your available credit limit, this will raise concerns about your credit management. Ideally, aim to use around a third of your available credit and not to max out any cards or overdrafts. This shows you can sensibly manage your credit and debt balances.
  
  
• Length of credit history: Start-ups and new businesses will have a limited history of using credit. The shorter your credit history, the less data the CRAs have available to measure your credit management skills. Where possible, aim to get a business credit card as soon as you can, and use it sensibly.
  
  
• Company size, structure and longevity: The size of your business is a major contributing factor. Lenders are far more likely to lend to an established, mid-sized business that’s part of an existing group structure. A small business that’s new to the market is inherently more risky to lend to.
  
  
• Public records: Any evidence of debt issues, insolvency or court cases will have a negative impact on your business credit score. If CRAs find county court judgements (CCJs), bankruptcy records or debt recovery letters in your directors names, this can seriously bring down your overall credit score.
  
  
• Multiple credit applications: Applying for credit with several different lenders and credit providers can increase your perceived risk. Multiple credit applications are seen as poor credit management and a sign of potentially urgent cash flow problems in the business.

How can you improve your business credit score and boost your funding options?

Once you understand the factors that can affect your business credit score, you’re in the best possible position to take action to build your credit rating. 

On the whole, this is about achieving a good payment history, managing your credit and debt well and making sure the business is in good financial health. 

But let’s dig a little deeper into ways to improve your credit score:

• Pay your invoices, suppliers and loans on time: Always pay your suppliers, credit card bills and loan repayments on time, every time. And even think about paying them before the due date to improve these business relationships.
  
  
• Keep your credit utilisation low: wherever possible, avoid maxing out your lines of credit. A credit utilisation ratio of around 30% is ideal. Only use credit where it’s absolutely necessary and justified – and can be paid off.
  
  
• File full annual accounts and confirmation statements on time: Part of your responsibility as the director of a limited company is to file your statutory accounts and confirmation statements on time. If possible, file full accounts that give as much detail as possible around your finances for the year.
  
  
• Monitor your credit score: It’s vital to regularly check your credit report. This includes tracking your score to spot any dips (or peaks) and also looking for any errors or inaccuracies that could be impacting your overall credit rating. Frequent checks help you identify any issues early, giving you plenty of time to take action and get your credit score back on track.
  
  
• Limit unnecessary credit applications: Only apply for credit when there’s a genuine business need. And don’t apply to multiple lenders and then max out these lines of credit. This will be a major red flag to both the CRAs and to any banks and lenders you approach for funding. 

What’s the fastest way to improve your business credit score?

If you’re planning to apply for funding, but your business credit rating is low, you need a fast solution to bump up your credit rating ASAP. So, what can you do?

The quickest way to build your business credit score is to prioritise on-time payments and reduce your existing debts. Low debt and a positive payment history will be looked on favourably by the CRAs, and will have the biggest and fastest impact.

What happens if your business has a low credit score?

The fallout from having a poor credit score can be significant, especially if the low score is left unchecked and no action is taken to improve it.

A low credit score may lead to:

• Loan applications being rejected by lenders, or unfavourable terms and interest rates being offered to you.
• Higher insurance premiums being offered by insurers, based on the high-risk rating that’s being demonstrated by your low credit score.
• Reduced supplier credit or stricter payment terms, due to the perceived high-risk nature of offering trade credit to your business. 

However, a poor credit rating isn’t the end of the road. Many lenders still offer flexible funding options. iwoca, for example, offers Flexi-Loans where your suitability is based on a review of broader performance data that goes beyond just credit scores.

How do business credit scores affect your supplier and partner relationships?

Your business credit rating isn’t just of interest to traditional lenders. New suppliers will often check your company’s credit score and risk-rating before agreeing to trade credit, or offering non-standard payment terms. 

A poor score may mean:

• Shorter payment windows (e.g. cash upfront or 7-day terms).
• Reduced negotiating power or limited trade terms.

Services like Experian’s Business Express company checks allow companies to get a credit profile of any business they’re considering trading with. This can also be good practice for your own financial due diligence when taking on a new customer. 

Can a poor business credit score affect your supplier relationships?

Yes. A poor credit rating can limit your access to trade credit and affect partner trust. If you want to build a network of stable suppliers, with good, trusted trading relationships, it’s important to work on maintaining a good business credit score. 

Can your business credit score impact insurance costs?

Some insurers do use your company’s credit data to assess your overall business risk. A higher score can mean lower premiums or access to better coverage terms. Not all policies are impacted, but your credit score can be a factor, so it’s sensible to do everything you can to maintain, improve and stabilise your credit score.

Steps to monitor and maintain a healthy business credit score

A strong business credit score is more than just a financial metric. It’s a key that has the potential to unlock additional funding, make trade credit easier to find and reduce the cost of your insurance premiums. 

Here are some simple steps to keep your business credit score on track:

• Sign up for credit monitoring tools: the major CRAs and credit bureaus, like Experian, CreditSafe and Dun & Bradstreet offer extensive monitoring tools that make it easier to track and build your company credit profile.
• Set up alerts for changes to your report: make sure you have both email and text alerts set up to notify you of any changes to your business credit score.
• Review your business credit profile regularly: carry out regular reviews of your credit score as part of your ongoing financial governance. Do this at least quarterly, but regular monthly checks would be good practice.
• Keep Companies House filings up to date: Ensure your statutory accounts and confirmation statements are filed on time and with all the correct and most up-to-date details and information included.
• Give prior warning of delayed payments: Communicate with suppliers and lenders early if payment delays are expected. Early warnings can preserve the relationship and allow time to agree on a repayment schedule.

iwoca: Small business loans that don’t rely solely on your credit score

At iwoca, we’re here to support your growth journey, whatever your goals. Applications for our small business loans factor in data from your cloud accounting and your bank statements to make a call on whether we can offer you finance.

With an iwoca Small Business Loan you can:

• Borrow £1,000 to £1 million
• Get a decision within 24 hours
• Repay early with no fees
• Get repayment terms from one day to 60 months

If you’ve got limited credit history and need a funding injection, come and talk to us.

Apply for an iwoca Small Business Loan