In your own personal life you probably know why your credit score makes a difference. You need to get a mortgage to buy that house you need because you’re in that place in your life when settling down seems the thing you’re supposed to do. You want to get a credit card so that you can take advantage of some last minute holiday deal to a sunshine resort but don’t have the funds to pay for it now.
You know that when you apply for these things your credit score is going to be looked at by the banks or the credit card companies to see whether you’re worth them risking their money on you. Are you going to pay them back? Are you going to pay them back regularly, and on time?
Without a good credit score, you probably know that your chances of getting the card, or the loan, or the mortgage, are reduced. Or you won’t get quite as much as you hoped for. You might get a £3,000 credit limit as opposed to a £5,000. Or a 6 months interest-free period as opposed to 12 months. You might be advised to provide 25% of the value of the property as opposed to 15%.
All because your credit score doesn’t show the financial institutions that you’re a good risk for them.
Well, it’s exactly the same for businesses when they need to get their hands on a new source of funding.
The financiers will take a look at the credit score of the business to see whether their money is going to be safe, but whilst we’re aware of this in our private lives, small businesses often pay no attention to it in their business life.
A Department for Business Innovation & Skills report into how small businesses try to raise external financing found that 69% of UK businesses had NEVER checked their credit score, despite the fact that 56% of SMEs have required external financing during the previous three years in order to operate their business.
And what happens when you need to get external financing? Your credit score gets checked. That’s a whole host of businesses going into financial negotiations completely blind as to their chances of success.
You need a loan to extend your premises or buy that new van. You contact a source of external finance and the first thing they’ll do is check how big a risk you are to them, and they’ll find out your credit score before you do!
How is it possible to plan your business if you have no idea what finance your likely to get given your credit score and visible financial record? The reality is that most businesses don’t plan this kind of thing.
The average time between a business enquiring about external finance and actually needing to use the finance is just 8 days. That’s not a lot of time to adjust your plans if you’re unsuccessful in getting all the finance you need, or the finance you do get is more costly than you expect, both of which might happen if your business’s credit score isn’t in good shape.
That’s why you should be monitoring your credit score from the day you start trading, because at some point in the future you’re likely to need it, and by that time it needs to be as good as it can be and there’s no time to take any steps to improve it if it isn’t.
Start putting some positive effort into your business credit score today so that when the time comes you’re ready. Check your score regularly, ensure the details are correct, pay your bills on time, file your accounts on time, don’t go overdrawn, and don’t default on any debts. You’ll then have a much greater chance of being able to finance the business on your terms.
What’s your business’s credit score?