How Do Business Credit Scores Work?
Business credit scores are a measurement of an organisation’s creditworthiness. Similarly to a personal credit score, a range of factors are taken into consideration to gain a clearer picture of the financial standing of a business.
A business credit score can range from 0 to 100. The lower the number, the higher the risk, with 100 representing the lowest risk possible.
What does a business credit check show?
When an organisation conducts a business credit check, typically they will be provided with the following information:
- The official business name
- Contact information
- Credit score and record
- Payment history and insights
- Legal claims and financial liabilities
- Details outlining revenue, expenses, and overall status
- Relationships with trade partners and suppliers
- Potential risk factors
All of these markers will help to shape the overall business credit score while providing a clearer picture of the health and reliability of the company.
Is a Business Credit Score Different From a Personal Credit Score?
A business credit score serves as the corporate counterpart to a personal credit score, detailing the credit history and rating of a business entity rather than an individual's financial reliability.
Businesses may have their credit score, payment history, any outstanding debt, and credit usage reviewed by suppliers, investors, and lenders to guide decisions based on their creditworthiness.
As such, a business credit score is different from a personal credit score, but its foundations and uses are not dissimilar.
What Is a Good Business Credit Score?
As a rule, a good credit score highlights the trustworthiness and creditworthiness of a business.
Business owners must prioritise their business credit score, working to maintain good credit to establish reliability and trust. When cared for properly, a good business credit score can be earned, representing the positive and trustworthy actions taken from a financial standpoint.
What is viewed as an acceptable credit score is very much dependent on the risk appetite of the company offering credit. Typically 60+ would be considered good.
The trouble with solely relying on credit scores is they do not give much in the way of context to the wider health of a business. To aid with this and make risk decisioning easier Red Flag Alert has developed a unique health score system.
Take a look at Red Flag Alert’s breakdown of health scores, and what varying levels of risk a lender may see:
One Red Flag
Companies that have one Red Flag have a higher chance of failure than Bronze companies and represent a moderate risk. This includes businesses that could be on a downward slide into insolvency, making them amongst the weakest 20% of UK companies.
Two Red Flags
Businesses with two Red Flags are considered as an extreme credit risk, with a high probability of significant legal notices. These businesses are also in the weakest 20% of UK companies.
Three Red Flags
A business that has three Red Flags is considered to hold the most significant financial risk, placing in the weakest 1% of UK companies. These businesses are expected to be on the verge of insolvency, and no credit should be extended to them.
How Will a Poor Credit Score Affect My Business?
A poor business score can limit the potential growth of your business as it will reduce the amount of companies willing to offer credit.
Businesses with poorer credit scores will face obstacles when applying for finance, and will often be handed higher interest rates, rejections or shortened payment terms. However, for businesses with good credit scores, their eligibility for competitive interest rates will be much more likely.
A business credit score doesn’t just dictate the types of interest rates on offer, it can also impact the working relationships across all aspects of business.
A business credit score can be accessed by anyone, from suppliers to clients, and even future partners. Companies with low credit scores may struggle to establish trust in their business relationships.
How to Improve a Business Credit Score?
If you discover that your business has a low credit score, then you could find it difficult to borrow money, but the good news is that improving your business credit score can be straightforward. These are some of the most effective ways you can start to improve your score:
Unsurprisingly, a strong business score can open many doors for a company. If a business is facing difficulty securing a loan, improving its business score can make these processes much smoother.
- Keep business information updated and accurate
- Monitor the business score and report closely
- Pay bills and invoices in full, on time
- Handle CCJs quickly
- File business accounts on time
- Manage debt with care
- Keep credit applications to a minimum
- Maintain solid personal finances
- Monitor suppliers’ credit scores
Adhering to these recommended actions offers a multifaceted approach to optimising and safeguarding your business credit profile.
Ensuring the accuracy of information on a business credit report ensures fair representation, while regular monitoring allows for timely detection and correction of any discrepancies.
Timely action across payments, filings, and communication will also contribute to a positive credit score, demonstrating financial responsibility, and stability.
Additionally, assessing suppliers' credit scores enhances risk management, and maintaining personal financial responsibility can further bolster overall creditworthiness, as some lenders consider both business and personal credit scores.
How to Run a Credit Check on a Company
Running a credit check on a company is an important step in mitigating potential risk. To ensure a business is protected, a credit check is a perfect opportunity to confirm the reliability of a business before entering a partnership.
Running a company credit check is easy with Red Flag Alert, simply search for the company you wish to check and access their credit score in the business report.
Why Have a Business Health Score and a Credit Score
A business health score and a business credit score are both data points that guide other organisations in their decisions on whether they would like to do business with a company.
However, they're measured on different scales and a business credit score report will be publicly available for customers, suppliers, and other businesses to check.
With this information readily available in a digestible format, businesses will have a detailed, reliable, and accurate report to refer to. In turn, this will speed up risk management processes, create transparency to improve trust and maintain a professional identity for the business.
Learn more about business credit ratings with experts Mark Halstead, Director of Data, and James Piper, CEO at Lightbulb Credit, for a deep dive into everything relating to a company credit rating. Check out the webinar – everything you need to know about your company credit score..
Empower your credit risk checking with Red Flag Alert
Red Flag Alert gives companies the tools they need to practice best-in-class credit risk checks and financial due diligence. Our easy-to-understand yet detailed company reports show:
- a credit score
- a company health score
- a timeline of health scores so you can understand the trajectory of the company’s finances
- bad debts
- full company history
- five years of full company results
- much more
“Our company monitoring tools provide a clear picture of a business. Instead of sifting through extensive data, craft a personalised dashboard to showcase the most relevant information based on your strategic goals,” says Richard West, Managing Director at Red Flag Alert.
“This not only streamlines your workflow but also enhances efficiency, allowing you to focus on what truly matters.”