A business with a poor credit rating can find it difficult to access loans and other financial services. That’s why we have analysed some credit agency models and found a few simple ways to boost your score, and avoid unnecessary exclusion.
Improve the way you file your financial accounts on Companies’ House
1. File your accounts on time – being prompt won’t necessarily boost your rating, but being late can cause problems. Use accountancy software like Xero or Sage to keep everything in check, and work with your accountant to prepare everything you need in good time. Keeping everything on-line makes this much easier.
2. File your accounts in full – your accoutant will more than likely have prepared them for the same cost as abbrievated accounts, so ask them to do the job for you. This gives creditors greater transparency, making it much simpler to assess your business.
3. Use a reputable auditor. This doesn’t mean you need to go to one of the ‘big 4’ professional services firms like. A well-practised local accountant who is a member of the ACCA is just as good. Audited accounts from a trustworthy source will give your business real legitimacy and boost your credit rating.
Avoid complicated corporate structures
Keeping your business’ structure simple (e.g. a UK Ltd company) makes it easier for lenders to understand and assess – instantly improving your credit rating. Too many subsidiaries or an unclear ownership structure are warning signs to potential lenders. More transparency and a clear corporate framework will give you a better credit score.
Stability at the top
If directors and board members are seen to be chopping and changing, it’s an instant sign for those looking in that trouble is brewing within a business. Try to avoid this instability as best as you can, as it undermines the rest of your business. Pick your partners for the long run and stay transparent on who controls the company. A strong leadership instils confidence, and will improve your credit rating.
Keep your net assets positive, separate business from lifestyle expenses
Make sure your total asserts always outstrips your total liabilities. Some lenders will outright refuse to lend to any business that has negative net assets. This might affect those owners who use their controlled companies to pay for their lifestyle expenses. Sole traders or entrepreneurs often don’t separate their personal expenses from their company expenses. Whilst this pattern is quite typical for SMEs, such businesses will show very low or even negative net assets, with the slightest of operating margins. It’s up to you how you run your business, but beware that this behaviour will have an adverse impact on your credit score and your ability to access credit.
Keep on top of your cash flow
It’s vital to maintain a healthy balance between your current assets, payables and outstanding liabilities. Poor management of working capital can leave your business heavily exposed to its incoming payments. Don’t be afraid to negotiate credit terms with your suppliers and your customers. You can also use invoice finance to improve your cash position – the most quick and flexible option is MarketInvoice of course (I’m a bit biased)!
It’s also important to check who you’re dealing with – do they pay on time, or do they pay late? Ask other business owners who have dealt with your prospective customer about their record. Credit check your customers, and ask to be paid promptly. Don’t accept unfair or unusually long payment terms, be prepared to walk away if these are forced upon you – it’s no good to see your business fail because of tight cash flow when you have a full order book.
County Court Judgements (CCJs)
CCJs are registered against your business when your creditor has gone to court to force you to pay them and the judge has ruled in their favour. CCJs are a fast-track to a poor credit rating – either pay them off or fight them vigorously, don’t let them fester. The more CCJs you have the lower your credit score. Less than one percent of businesses in England and Wales have outstanding CCJs, so those that do are in a tiny minority that will suffer. Deal with them as quickly as you can.
Debentures and charges? These actually DON’T affect your credit rating.
Your credit score is impacted by the amount of debt you carry as a business, but not by what kind of security you have provided to your creditors. For example, granting an all asset debenture (contract by which you pledge all of your business assets to your creditor) doesn’t in itself impact your credit score, it just makes it necessary for any new creditor to agree with your existing creditor on how your assets will be divided up if your business should fail. If a lender wants to provide you with credit, but has to get consent from your existing creditor, don’t be afraid to ask for it. Banks in the UK have a process for ensuring that the consent is provided in reasonable time and even if consent is refused, they can’t change the terms of your current lending agreement. So asking for consent won’t damage your credit rating, or your ability to get credit in the future.
Most of the time when a business is refused credit (or quoted an expensive price) it’s not the result of specific information that looks bad, it’s actually the result of a lack of information. By sharing more information about your business online, you’ll most likely find yourself a much more attractive prospective borrower.