In a recent interview with Paul Surtees, founder and CEO of Capitalise, we delved into the intricacies of business credit scores, their importance, and how tech and e-commerce businesses can effectively improve and monitor them. This article aims to provide a comprehensive understanding of business credit scores and offer practical steps to improve them.
What is a business credit score?
A business credit score is a simplified aggregation of various risk factors, typically ranging from 0 to 100, with higher scores indicating lower risk. Experian’s score, for instance, is called Commercial Delphi. This score encompasses multiple elements, including the stability and creditworthiness of directors, the financial health of the business, and its payment history. Paul emphasised that a business credit score is not just about the company but also reflects the financial behaviour of its directors. In fact, revolving directors or frequent changes in leadership can negatively impact the score, adding risk and uncertainty to the business profile.
What is a business credit rating?
A business credit rating is a numerical expression based on a level analysis of a business's credit files, representing the creditworthiness of the business. It’s used by lenders and suppliers to evaluate the likelihood of the business repaying its debts. According to Paul, about 90% of lenders use the Experian Delphi score as a key reference point when making lending decisions. It’s not just for companies looking to borrow, but the credit rating can also be crucial when tendering for contracts, especially with large organisations or government entities that require assurance of your business's financial stability.
What is a business credit limit?
A business credit limit is a recommendation by a credit rating agency regarding the maximum amount of credit that should be extended to a business for a 30-day period. This helps suppliers manage their risk when offering credit terms. For example, if a business has a high credit score, it might be recommended for a higher credit limit, allowing it to access more resources without upfront payment, thus helping cash flow management; this is effectively interest-free working capital. Paul noted that maintaining good supplier terms through higher credit limits can significantly enhance a business's operational efficiency by providing crucial working capital.
How do each of these interact?
The credit score, rating, and limit interact to provide a comprehensive view of a business's creditworthiness. The score aggregates risk factors, the rating classifies the business's credit quality, and the limit suggests a safe amount of credit to extend. Paul noted that while these elements are interrelated, they serve different purposes for lenders and suppliers. An improvement in your business credit score and rating can reduce the perceived risk to lenders, potentially lowering the interest rates they apply. This interplay also means that increasing your credit score can directly lead to higher credit limits, which in turn can be leveraged as interest-free working capital through supplier terms.
Why does a business credit score matter?
Paul outlined three primary reasons why businesses should care about their credit scores:
- Future stability: To demonstrate to lenders and partners that the business will continue to operate effectively and responsibly.
- Supply chain management: To use 0% interest working capital from suppliers, improving cash flow without additional costs.
- Access to capital: To secure external capital under more favourable terms.
What is a good business credit score?
A good business credit score typically ranges from 80 to 100. Scores within this range indicate a low risk of default, making it easier for businesses to obtain credit on favourable terms. According to Paul, businesses with scores above 80 are often seen as low risk by lenders, which can open doors to better financing options and more favourable terms from suppliers. For e-commerce and tech start-ups, maintaining a high score can be crucial for securing the necessary debt capital to scale operations and invest in growth opportunities.
How can a business check or monitor their business credit score?
Businesses can check their credit scores through platforms like Capitalise. For detailed insights, businesses might opt for plans that provide comprehensive monitoring and analysis of their credit health. Capitalise offers different tiers of service, from basic checks to in-depth analysis and credit review services, which can help businesses stay on top of their credit profiles and take proactive steps to improve them. Paul emphasised the importance of regular monitoring to identify and address issues promptly, making sure businesses can maintain or improve their scores over time.
Why does a business credit score matter for e-commerce or equity-backed tech businesses?
For e-commerce and equity-backed tech businesses, a good credit score can facilitate better trade terms and access to funding. These businesses often need to maintain healthy cash flow and secure financing to support growth, making a strong credit score essential. Additionally, having a solid credit score is vital for businesses seeking to build trust with suppliers and negotiate favourable terms that can improve their cash flow.
Credit rating agencies take a conservative approach when the lack detailed information. By being transparent and sharing comprehensive financial data, business can significantly boost their credit scores to unlock more favourable terms.
What's the value of improving your credit score?
Improving your credit score can lead to lower interest rates, higher credit limits, and better trade terms. It enhances the business's financial stability and attractiveness to lenders and investors. Paul pointed out that businesses with better credit scores are more likely to receive favourable terms on loans and lines of credit, which can be crucial for managing growth and expansion. Moreover, a good credit score can reduce the cost of capital, making it easier and cheaper for businesses to finance their operations and investments.
How do you make sure you have the best credit score?
To improve your business credit score, consider the following steps:
- File accounts promptly: Ensure timely filing of accurate and detailed financial accounts.
- Maintain good director credit: Ensure directors have strong personal credit scores.
- Manage debt wisely: Keep liabilities low and ensure timely repayments.
- Increase transparency: Provide detailed financial information to credit rating agencies through services like Capitalise’s Credit Review Service.
- Monitor regularly: Regularly check and monitor your credit score to catch and correct any discrepancies.
Paul elaborated that Capitalise’s Credit Review Service can significantly boost your score by providing up-to-date, detailed financial information that credit rating agencies might not have, such as management accounts and full unabbreviated filed accounts anonymously. This can lead to immediate improvements in your credit score.
How quickly can you expect it to improve?
With services like the Credit Review Service offered by Capitalise, businesses can see improvements in their credit scores within 24 hours to five days after submitting updated financial information. This rapid turnaround can be critical when a business is seeking immediate financing or looking to secure better terms with suppliers. Paul mentioned that by promptly submitting comprehensive and accurate financial data, businesses can quickly enhance their credit profiles and improve their access to capital. To really access the benefit of CRS you should implement this immediately after filing your accounts.
Taking the next steps
Improving your business credit score isn’t just about accessing better financing terms; it's about making sure the long-term financial health and stability of your business. By understanding what goes into your credit score and taking proactive steps to improve it, you can position your business for greater success. Credit rating agencies primarily gather their data from public sources. However, because many SMEs file filleted accounts, there's often a lack of detailed information, leading to conservative scoring. Providing supplementary information can significantly boost your score.
For e-commerce and tech start-ups, focusing on your credit score can help make sure that you are seen as a reliable partner by suppliers and a low-risk investment by lenders. Whether it's through timely filing of accounts, maintaining good personal credit, or leveraging services like those offered by Capitalise, the steps you take today can make a significant difference tomorrow. For any business serious about its financial health, regularly monitoring and improving its credit score should be a key part of its strategy.
For more information on how what your credit score is or how to improve your credit rating, speak to your Fractional CFO, or get in touch.
