Get a credit report
A commercial credit report is a powerful tool. Not only can you obtain your own score as a business owner, but also competitors and suppliers; and you can be sure they’ll be looking at yours. As an example of what can be obtained, Experian can assess a company’s cash flow risk and suggested credit limit. Some credit agencies also supply you with the factors that are affecting your score, which will help you target where you can improve. Expect to pay around £10 per month for your own report.
Maintain good business practices
Paying invoices late damages your reputation and your relationship with others, and possibly impinges on their business as well. Install a policy of paying invoices within an agreed time frame or at least 30 days, and ensure that all staff are aware of this throughout the company. In late 2015 Experian reported that the problem of late payments was getting worse, with 51% of companies waiting more than 30 days to be paid and 23% stating that late payments had put them at risk of closure.
- Borrowing/securing loans: you may be able to obtain credit with a moderate credit score, but the lending conditions might be less favourable; for example, you may not be able to obtain the amount you want, or you may have increased costs/annual fees.
- Avoiding high interest rates: Know Your Money compares business and start-up loans that could give you access to funds in minutes, with interest rates as low as 5-6%. However, this might not be available if you have a poor credit history/track record.
- Access to trade credit: a credit line with a supplier is more likely to be available with a good credit score.
Pay bills/loans on time
Late payments on bills (to include utilities, insurance, mobile phone contracts, etc) can damage a credit score, particularly if there is a cluster of missed payments in a short space of time. Missing repayments on a credit card may not only incur a penalty charge, but also a shift onto a higher interest rate.
Review current finances and move to lower interest rates
The faster you can pay off debt without putting yourself in financial trouble, the better. Swapping to a loan with a better interest rate will reduce the temptation that you may have in the early stages of the SME to use your personal credit cards. Using credit cards to make pricey cash withdrawals and missing repayments can be costly. The latter may not only incur a penalty charge, but also a shift onto a higher interest rate; for example, a shift from a 15% interest rate on a £20,000 credit card debt paying £1,000 a month to 18%, will take your interest from £2,922 up to £3,594 – in just a two-year repayment schedule. Also, be wary of any suspicious behaviour around customers paying with credit cards or paying online.
Avoid county court judgments (CCJs)
If you owe money to people such as a supplier, creditor or contractor they can apply to the county court for a judgment against you, which will stay on your record for six years, unless your debt is paid off within a month. This will adversely affect your credit rating and your ability to get a mortgage or loan, as it may be a warning of a company in distress. Some SME lenders will take a look at the overall picture when you apply - so if a customer let you down in the past but you managed to recover you can explain this in your application – but the better option is to obviously avoid CCJs altogether.
Employ the right people
This applies at all levels; if you bring in senior staff with a history of running or rescuing businesses, you might quickly reap the benefits. If you’re setting up, a partner director with a good track record in start-ups might be a good move, as credit agencies check directors and their past successes. Not only will a director have more experience (and perhaps cash) in a particular field, but also potentially more contacts who might supply new investment and revenue streams.
Diversify your customer base
We mentioned above the fact that it’s possible, indeed advisable, to gain the credit ratings of suppliers and customers. You’ll probably find a diversity of scores and with that in mind, relying on a handful of high-risk clients/partner companies will leave you and your business vulnerable if they are struggling financially. Keep searching for new and interesting possibilities.