Part 1 of 3
If asked the question “How’s your business credit profile?” would you know the answer?
There are many reasons why your business and personal credit profiles are important and could have a significant impact on your business. Examples include looking to deal with a new supplier, move premises or approach a new finance provider; your credit profile will have a significant impact on the outcome of the negotiations or even impact on whether the deal takes place. Therefore, ensuring your business and personal credit profile is sound is crucial to the foundations of building and growing your business, together with giving you the power to negotiate to your strengths.
But remember, without taking credit you cannot build a credit profile, but use it responsibly. Establish credit relations with suppliers, pay within the agreed parameters and maintain communications to negotiate preferred rates and terms of payment. This will all assist in building your creditworthiness and profile.
So how do you go about checking out your personal and business credit score?
Your personal credit score is by far the easiest to access. Companies called ‘credit reference agencies’ (CRAs) compile information on how well you manage credit and make your payments.
Four of the main CRAs are:
- Dun & Bradstreet
Each of them holds a file on you, called a credit report (or credit file), however, the information might differ between CRAs.
Your credit report will typically hold the following information:
- A list of your credit accounts. This includes bank and credit card accounts as well as other credit arrangements such as outstanding loan agreements or utility company debts. They will show whether you have made repayments on time and in full. Items such as missed or late payments or defaults will stay on your credit report for at least six years.
- Details of any people who are financially linked to you, for example, because you’ve taken out joint credit.
- Public record information such as County Court Judgments (called ‘Decrees’ in Scotland), house repossessions, bankruptcies and individual voluntary arrangements. These stay on your report for at least six years.
- Your current account provider, but only details of overdrafts.
- Whether you are on the electoral register.
- Your name and date of birth.
- Your current and previous addresses.
- If you’ve committed a fraud, or someone has stolen your identity and committed fraud, this will be held on your file under the CIFAS section. (CIFAS is a not-for-profit fraud prevention membership organisation).
All CRAs have a statutory obligation to provide you with a copy of your credit report for free and you can access the report online or by requesting a written copy.
Unlike your personal credit score, obtaining your business credit score is not so simple and straightforward unless your business is a registered limited company.
CRA’s such as Creditsafe and Experian offer a free business credit check for limited companies and factors that determine business credit scores are similar to those used to calculate your personal credit scores, others are unique to business credit scores and include:
- Payment history
- Length of credit history
- Outstanding Debts
- Public records, such as bankruptcies, liens and judgments
- Company size
- Industry risk
However, if you are a sole trader or Partnership then your credit profile will be determined on your personal credit profile. This will be considered in conjunction with your financial activity, business accounts, bank accounts, levels of borrowing and trading history.
Things that will negatively impact on your credit profile will include the number of loan applications you have made, rejected applications, County Court Judgments, missing payments and mistakes!
So whilst ensuring your credit profile is sound and strong, it as just important to ensure your accounts are up to date, tax returns are completed and payments made to HMRC, together with paying your suppliers on time.
Lenders and other creditors look at information reported to the CRAs. They use this information to try to determine what you might do in the future, based upon what you’ve done in the past. As a result, this can make it difficult to overcome a less than perfect or non-existent credit profile overnight; it takes time to build a strong profile.
As a business owner, it is therefore important to review your business’s financial information including your business credit score and reports on a regular basis. It is only by reviewing this important information you will have the knowledge to know the strength of your business credit rating, and if you think it should be higher it will give you the opportunity to investigate what is going wrong. This information is essential for your business to grow and develop.
Remember by knowing your business credit profile it will allow you to ensure that you are in control of how suppliers and lenders see you. Try not to blur the lines, keep your personal credit and business credit separate. This may be difficult in the early days of business, but in the long run, it will be beneficial in building your business profile.
Next week we will investigate the types of business credit reports, how to understand them and ways to improve them.