What is business credit?
If you want to build your business, you need to build your credit score. Many business owners have little or no idea as to where to find out information about their business credit. If that sounds like you, it’s time to find out what business credit is and how it can help your business grow.
What is business credit?
If you’re familiar with your personal credit score then your business credit score performs a similar function. Your business credit score is visible to everyone who might want to do business with you, so this record of your business’s financial responsibility helps lenders to determine whether you’re a good risk for investment. The better your score, the easier it is to acquire financing and grow your business in the future.
Insufficient financing is one of the most common reasons for business failure. By establishing good business credit from the outset, you can leverage better rates and payment terms. Linking credit directly to your business can remove potential obstacles to funding and protects your personal credit rating if your business goes under.
How is business credit calculated?
Credit agencies will typically rank your business from 0 to 100. The higher the score, the better the calculated risk you represent. Maintaining a credit score of 80 and above is good practice for any SMB.
Major business credit agencies use the following criteria to assess your score:
- Payment history and likelihood of making on-time payments
- Credit risk
- Business failure score based on the likelihood of your SMB failing
- Number of years in business
- Lines of credit already secured
Your business credit file is not private. It can be accessed by any business, creditor or financing company and may be sold to anyone who wishes to view it.
How to access and build your business credit
The trick to maintaining a high business credit score is to secure credit and manage it properly. In turn, you need to ensure that your business is correctly set up to qualify for credit:
- Structure and register your business
- Open a business online bank account that establishes your financial health and protects your personal credit history
- Lease business premises and establish a business profile
- Check your business credit score to build your profile and avoid identity theft
- Pay your bills on time in order to build a positive payment history
What credit is open to small business?
Online lenders have radically altered the industry in the UK and a loan can be quickly secured as a vital means of business credit. There are two primary types of business credit that are open to small businesses in the UK; secured credit and unsecured credit.
- Secured credit: the lender knows that you have the assets to be able to repay the loan. Therefore to secure £1000 of credit, you’d need to present documentation proving that your business has £1000 in cash or other assets.
- Unsecured credit: This type of loan is not based on your assets and collateral which are not considered a factor in the loan agreement. You’ll usually pay in fixed monthly instalments with a fixed interest rate.
Other lines of credit worth considering include:
Business credit card
Exactly like a personal credit card, your business will have a credit limit and an interest-free repayment window. However, a business credit card can be difficult to manage and expensive if you can’t make the repayments in the interest-free period. Some business credit agencies reward you for low utilisation of your business credit cards.
A useful form of extra working capital when you need it, SMBs can sometimes find it hard to access anything more than a low overdraft limit from traditional banks.
This type of financing can unlock the cash flow tied up in your invoices. While not suitable for large capital projects, this can be a valuable way to get paid faster.
Merchant cash advance
This type of credit lets you borrow against sales paid for by card, but it is only suitable for cash flow and providing working capital.
Also known as net-30 accounts, this type of account lets you pay for products and services on a buy now, pay later basis. Other payment terms are available. This type of credit can also add a useful and positive tradeline to your business credit score.
Benefits of good business credit
Maintain good business credit and you’ll notice one or more of the following benefits to your business:
- A good business credit score may not be the only factor in qualifying for financing but it can improve the odds of you getting a loan or line of credit significantly
- You can protect your personal credit score and simplify your accounting
- You’ll be offered better rates, loans and credit card deals
- You can save money on insurance premiums, better interest rates, smaller deposits and better trade terms from suppliers
- A better credit score makes your business more attractive to investors and increases its value
The slow accumulation of debt and a string of missed payments can have a devastating impact on your credit score. Maintain good credit score practices and you’ll be able to leverage the benefits of a good credit history and get ahead of the competition.