How to Control Your Credit as an SMB

As a start-up or small business, there will likely come a time when you need to secure credit, whether to invest in growth, new equipment, bigger premises or other activities that will help your business to develop. Getting credit, such as a business loan, can be daunting, but it is also an essential tool for many SMBs. If you’re planning on sourcing additional finance, you can do several things to give yourself the best chance of success, and the health of your credit score will be a key factor.

What is a business credit score?

A business credit score is the measure of a business’s creditworthiness. It comprises several factors, such as payment history, age of credit history, debt and debt usage, industry risk and company size. If you apply for credit, lenders will look at your company records to decide if your business is creditworthy, and your credit score will have a major impact on any decisions. This means that building and maintaining a good credit score is key to taking your business to the next level. 

What is a good credit score?

Credit scores are usually based on a 0-100 rating, with a higher number representing a better rating. However, there is no universally accepted level at which your credit score will be deemed ‘good’. Different credit reference agencies, which determine this score, may even use different rating systems.

As a guide, though, you may struggle to secure a business loan if your rating is less than 40, although other factors, such as being able to prove that your company is a well-established business, may help.

A good score will generally be in the 40-80 range. If at the lower end of the scale, factors such as company revenue, records of transactions and previous loans, and growth history may also be requested to support a loan request.

For businesses with a credit score in excess of 80, funding should be relatively easy. Depending on the lender, they may also benefit from lower interest rates and better repayment terms.

Ten ways to improve your credit score

So, if your credit score languishes at the lower end of the scale, what can you improve it?

1. Get Invoicing Right 

Top of the list is to ensure you have a consistent and accurate invoicing process so your clients know how much they have to pay and by when. Accounting software can be a huge help here, with custom invoices delivered directly via email, the ability to create recurring payments and simple tracking of outstanding invoices.

2. Pay on time 

While being paid on time will help, ensuring you settle your debts promptly will also greatly impact your credit score. Setting up payment reminders can be helpful, and consider paying early – this may also result in early payment deductions. Again, accounting software can be an asset here, with the ability to create purchase orders, convert POs into supplier invoices and track their status, all valuable features.

3. Keep your records updated

Keeping accurate accounts is essential for a small business. It’s also vital that you submit your accounts to Companies House in good time and that you ensure all your company details are accurate. Failure to do this could give lenders the impression that you’re struggling, which may put them off lending to you.

4. Avoid opening new accounts 

Just as with your personal credit score, applying to open new accounts can have a negative effect, so only open a new business account if you need to.

5. Don’t close your old accounts 

Interestingly, keeping old accounts open and active can actually help your credit score, so don’t rush to close an account once you’ve paid off the debt. The same applies to unused credit cards. Closing these can negatively impact your credit utilisation ratio – the percentage of your credit limit you’re using. If your limit is reduced by cancelling a card or closing an account, the percentage you’re using will immediately increase. Generally, aim to keep your credit utilisation below 25%. 

6. Wait it out

If you’re a few months into running your business with little in the way of financial records and no proof that your business is viable, securing a loan will be more challenging and will likely come with a higher interest rate. While there may be times when funding is urgent, if you can wait until you’ve proved your profitability for a couple of years, you’ll have a much better chance of securing a competitive loan.

7. Separate business and personal finances 

By keeping your business and personal finances apart, you can work to maintain good credit on both, or at the very least avoid bad credit on one impacting the other. Keeping accounts separate will also make it easier for your accountant when the tax season comes.

8. Boost your revenue and cash flow 

Not surprisingly, lenders will assess your annual revenue and monthly cash flow when determining whether they’ll lend to you. So, if you know you will need funding in the short to medium term, start thinking about ways to boost your revenue. For example, this could include a big marketing push or introducing new services. It will also be worth re-evaluating your cash flow to see if you could reduce spending or incentivise clients to pay more quickly.

9. Monitor your business and personal credit 

Of course, you’ll have no idea if any of these changes are having an impact unless you pay attention to your credit. This will also help you to identify any errors on your credit report. Remember, lenders may well look at your personal credit score when you apply for a business loan to see if you are a responsible spender in day-to-day life too, so aim to keep this high. Personal credit scores range from 300 to 850, with anything above 650 heading into the good range. If you are lower than hoped, the same principles largely apply as in business to boost your score, so pay bills on time and watch your credit utilisation ratio.

10. Fix errors immediately

If you do spot any errors or inconsistencies as you monitor your credit report, be sure to fix them as soon as possible to minimise the impact on your credit score. To do this, get in touch with the credit reporting company – many have dispute centres to deal specifically with this. They will then investigate the claim, and if they agree there’s been a mistake, they must notify all of the credit reporting companies that received the inaccurate information so they can update their reports.