You might have heard the term ‘business credit’ when you’ve been trying to get a loan, negotiate with suppliers or secure a contract. But, what does it actually mean? How can you use it to your business’ benefit? Does your business really need it? Business credit is usually an essential and can actually be the difference between being short on cash or having the money you need to grow and invest in new opportunities.
What is Business Credit?
Business credit is a reflection on how good your business’ finances are. It shows how reliable your business is when it comes to paying its bills, managing credit and meeting its financial obligations. Before deciding to work with you, lenders, suppliers, insurers and even possible partners might check your business credit, to get an idea of whether you’re a safe choice.
There are a handful of credit agencies in the UK that focus on businesses. They gather and look at financial data about your business, such as payment history to suppliers and creditors, current credit – including loans, credit cards, overdrafts and other money obligations – County Court Judgements (CCJs) and records of late payments or bankruptcy. As your business grows, your business credit score becomes more and more important.
Why Business Credit is Important
A lot of business owners don’t think about business credit until it’s too late. But, having a good credit history early on is key, as it can open doors and keep your business safe going forward.
Borrowing Money is Easier
When you apply for a loan, banks and other lenders often look at your business credit profile. Good business credit means it’s more likely for you to be approved, and it might even get you better terms and interest rates.
Better Relationships with Suppliers
Businesses with a good credit history are more likely to get longer payment terms from suppliers. 30, 60, or even 90 day terms can really help your cash flow, giving your business a chance to invest in growth, instead of worrying about costs.
Less Risk for You
If your business credit is good, lenders are less likely to ask for personal guarantees when you want to borrow money. This keeps your personal property safe, whilst your business can still access money and grow.
More Credibility
A good business credit score shows that the business is stable and trustworthy. This can be useful when you’re bidding on contracts and talking to investors or partners about deals. You’ll have more control over what your business can do, and the doors that credibility opens.
How to Build Business Credit in the UK
It takes time to build business credit, but the right steps can help you to get started.
Get Your Business Set Up the Right Way
It’s important to have correct and consistent financial records from the very beginning. Companies House and other official sources are important to credit reference agencies, and you need to get things off to a strong start. This means registering your business with Companies House, using a separate email, phone number and business address. It also means setting up a business bank account and not mixing your personal and business finances. Your credit score can be affected by even small mistakes, like putting the wrong company name on invoices.
Keep an Eye on Your Business Credit ReportYou can get a copy of your business credit report, so you can look for mistakes, keep an eye on changes to your score, and see what lenders and suppliers can see. Checking your report regularly is a simple but effective way to protect and build credit. Plus, it means you’ll spot any errors the moment they appear.
Set Up Supplier Accounts
One of the best ways to build business credit is to open a supplier account, sometimes known as trade credit. You can do this to buy things like office supplies and bulk goods, and to rent or lease equipment. The most important thing is to use these accounts wisely and pay your bills on time. Every payment that’s made on time helps you to build a good business credit history.
Pay Everything on Time
One of the biggest threats to your business credit score is paying late. Credit agencies can report even one missed payment, and it can stay on your record for years. It’s easier to stay on track if you set up automatic payments for bills that come up regularly, and use accounting software to keep track of invoices. It’s also a good idea to keep some extra cash on hand for unexpected costs.
Be Smart About How You Use Business Credit
Credit cards, overdrafts and small loans can help you to build a strong credit history, but only if you use them in the right way. This means you need to avoid going over your limit, you need to pay everything back on time, and you should only take out what your business can afford to repay. Using credit in a smart way shows that you’re financially responsible, which will help to improve your score.
Make Sure Your Business Stays Financially Healthy
Credit agencies don’t just look at one transaction, they look at the whole health of your business. Having a lot of debt, not managing cash flow well and regularly using credit to run the business on a day-to-day basis are all red flags. A financially stable business is more likely to receive favourable lending and payment terms.
You might have heard the term ‘business credit’ when you’ve been trying to get a loan, negotiate with suppliers or secure a contract. But, what does it actually mean? How can you use it to your business’ benefit? Does your business really need it? Business credit is usually an essential and can actually be the difference between being short on cash or having the money you need to grow and invest in new opportunities.
