Why Businesses Should Pay Attention to Credit Scores

As a business owner, understanding the credit score of businesses you work with, can either fill you with confidence or fear. Understanding credit scores is important to ensuring you have confidence in B2B transactions, but it’s also important for understanding yourself. Recent research from Experian offers some interesting insights in this regard.

The best and worst credit scores

Research from Experian has shown which areas of the country are particularly ‘good’ or ‘bad’ for credit scores. Overall, businesses in the South West have fared well. They have an average business credit score of 54.7. A rating of this level represents a lower than average financial risk. Business areas faring particularly well include Hereford, Exeter, Taunton, Truro, Torquay and Plymouth.

In contrast, a staggering 8 out of 10 of the lowest scoring areas are in London. The businesses in these areas had an average 47.2 credit score. This is considered notably above average risk.

What does this mean for your business

Well, the news is interesting for two reasons.

Firstly, it is important to feel confident in doing business in expectation of having your invoices paid on time and in full. Credit scores can help you understand the likelihood of this.

Secondly, it’s important to understand the significance of your own credit rating and how to improve this.

How to improve your business credit rating

Let’s focus on improving your own credit rating so that other businesses trust you.

The single biggest way you can positively impact your business credit rating is to always pay invoices on time, and keep your accounts up to date. Cloud bookkeeping makes this simple. Gradually over time, your reliability is rewarded with a good credit score. Paying your bills on time shows that you’re in a good position in terms of cash flow.

In addition, to boost your business credit score, you need to be able to demonstrate you service your debt well. Whilst it is good practice to keep your business debt low, it is also helpful to have a small amount of debt which you pay back regularly and on time to build your reputation. Even when accounts have been paid off, it can be beneficial from a credit score point of view to keep the account open.

It is good practice to periodically check your business credit rating. This way you can see if there are any significant negative shifts in your score and take steps to rectify or amend these.

For start-ups who don’t yet have a credit history, but which are closely linked to the owner/sole trader, take particular care with your personal finances. In the absence of business data, personal data can be used as a measure of your reliability.

Also, spend some time reviewing your balance sheet. There should be a high degree of cash flow with a good balance between assets and liabilities.

Why is a good business credit score important?

Good business credit scores are important for several reasons. As a small business or start-up, you will particularly benefit from a good credit score if you’re looking for loans or grants to develop your business further. Having a lower credit score should open up more opportunities for lower interest rate lending.

Applications for loans and grants can also negatively impact your credit rating. Every credit application, including the ones you are turned down for, come together to affect your credit score. Therefore, take care to only apply for loans and grants when you believe you have a genuinely good chance of being awarded them.

Building a good credit score is important for accessing funding for growth.

Are you worried about your credit score? Keep on top of your finances with the help of Pandle’s simple cloud accounting software!

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