The key to survival – how businesses can improve poor credit ratings and beat the upcoming recession

Lynne Darcey Quigley, Founder & CEO of credit management solution Know-it, talks about the importance of a good credit score and how businesses need to embrace good credit management practices now.

In the light of the recent rises in inflation, rising operational costs and the recession expected to hit later this year, many businesses will look to boost their credit ratings to limit hiring freezes and supply chain shortages, which impact productivity and output.

The key to thriving even at the darkest times of a recession is to have a business credit score that will hold a business in good stead for a successful future and strengthen financial security in the event of a downturn in the market due to uncertainty surrounding the economy.

Yet it is important to remember that ratings can vary depending on which credit reference agency a business chooses to use. Each uses slightly different criteria and algorithms to calculate credit ratings. But typically, a good business credit rating from one credit reference agency will translate to another.

A good business credit rating opens doors to growth

A host of opportunities for growth and expansion is possible once a company has a good credit rating while also giving businesses peace of mind if there is a downturn in the market. In times of downturn, enterprises are likely to turn to seek out funding avenues and the company’s credit score will be checked to see how trustworthy a business is and how likely they are to default on payment. A company’s credit report will also be checked in the event they purchase large ticket items such as machinery or commercial premises and when ordering large quantities of stock.

A low rating suggests that a company is slow-paying invoices (if they pay them at all) or does not abide by payment terms, so they are deemed a high credit risk to lenders and suppliers. A low rating can restrict a company’s operations and drastically limit its overall growth potential.as it will also determine how much money a business can borrow, how much stock it can purchase per order, payment terms and interest rates.

Addressing why your business might have a poor credit rating

There are several ways a business can improve its credit rating, starting with immediate activities such as addressing missed payments on loans, credit cards, suppliers, and other expenses such as rent. Yet, it is also essential to understand that it cannot just be an overdue payment that can lower a credit rating.

Not abiding by an agreed repayment schedule or credit terms can reduce a business’s credit score. Even County Court Judgements (CCJs), Insolvency or bankruptcy, having a poor debt to credit limit ratio, also known as credit utilisation rate, late filing accounts to Companies House, and making multiple credit applications simultaneously can lower even the best of business credit ratings.

Fraudulent activity can also harm a business’s credit score as criminals typically try to take out credit and loans in a company’s name. Businesses may notice a sudden unexpected drop in their business credit score, and it is always worth checking for potential fraud.

Turning a poor credit score into an excellent one for your business Whether a business has a poor, fair or reasonable credit rating, it always helps to improve it where possible. For example, keeping relevant parties up to date with any financial and business changes can boost a failing score. Be sure to inform customers, lenders, suppliers, banks, and directories like Companies House of changes that affect your rating. Inconsistencies or inaccuracies in business information can make it look untrustworthy and unreliable, which may negatively impact a rating. Other activities to boost a score include:

• Making your payments on time

• Ensure your finances, such as your turnover, are transparent

• Submitting your full accounts on time to Companies House

• Consider setting up a private limited company (Ltd)

• Opt-in to open banking

• Limit the number of credit applications in a short period of time

• Reduce your debt-to-credit ratio

• Dispute any errors on your credit file

• Establish a good relationship with your suppliers

It is critical that businesses check their credit scores and reports frequently so they can react quickly to any changes. An automated company credit checking, and monitoring solution makes this easier, using the most up-to-date intelligence from multiple reliable sources to help managers make informed credit decisions. Business owners can consider running a credit report that keeps them up to date on changes if it offers a credit monitoring facility that can forward notifications of any changes.

When working to build a business’ credit rating, it is essential that its progress is available in real-time. Business owners, finance managers and credit controllers can unlock key insights from a business credit rating that will help them see what improvements a business can make for future financial prospects. At the same time, companies should be able to check other business credit ratings if they are potential suppliers and key customers to know the shape of their customers’ credit reports.