Why good credit is so important for a small business

As a business owner, you'll likely wear many different hats: marketer, bookkeeper, sales rep, team leader. Business finances are no exception.

Businesses don't come with instruction manuals (although they totally should). It's easy to set up a business, but it's not always easy running one, especially when it comes to the financial side of things. Managing your finances is one of the most important parts of running a business, and your business's credit score forms a key part of that.

What is a business credit score?

Think of your business credit score as a barometer for the financial health of your business. It's essentially the likelihood your business will be approved for funding.

We're all familiar with personal credit scores: tools used by lenders to help determine whether we qualify for a particular credit card, loan, mortgage, or service. If you've ever applied for a mortgage or purchased a car on finance, you'll be well aware of your own credit score and how it works.

A higher credit score means lenders see us as less of a risk, and we're more likely to be accepted for loans and offered better rates. A low credit score makes us look untrustworthy to lenders and can stop us from getting approved for credit cards, loans, and mortgages.

It's just the same for businesses. Your business's credit score is something you might not have considered when setting up your business– or even have heard of until now! But if you have a business, then that business also has a credit score.

It's worth noting that if you operate as a sole trader, lenders will use your personal credit score to determine the creditworthiness of your business, since you and your business are considered the same 'legal entity'. But if you own a limited company, your business will have a separate credit rating independent of your personal credit rating.

It's well worth checking your business's credit rating using a website like Experian or Equifax. (Whilst you can view your personal credit score for free, these platforms provide you with your business's credit score for a fee.)

So why is good credit so important for a small business?

Get access to funding

Funding is vital for helping a business grow, weather a rough patch, or even get off the ground in the first place. Almost all businesses will need some form of funding during their lifecycle. Be it a business loan, asset finance, invoice finance, management buyout, mortgage. Or, to be honest, any of the other various types of finance that are available.

Since most lenders will consider your credit score when reviewing your application for a loan or consumer credit, a bad credit rating is one of the biggest barriers to funding.

A good credit score opens the doors to more funding opportunities, making it easier to access small business loans and other types of finance. Lenders will view your business in a more favourable light and deem you more 'creditworthy' if your business has a good credit rating. In other words, you shouldn't have a problem being accepted for finance as and when you need it.

The opposite is true for a bad credit score, meaning you could be faced with poor loan terms, high interest rates or fees, or be refused business credit altogether.

Receive loans at lower interest rates

The better your credit score, the better your interest rates on loans.

When you apply for a loan, having a good credit score will make it easier to negotiate better terms like lower interest rates and higher credit limits, saving you money in the long run. Lower interest rates could save your business thousands of pounds in interest payments!

On the other hand, a business with a lower credit score will face higher interest rates and lower credit limits. Since a bank or lender will be doubtful that you’ll pay back your loan responsibly, they may charge more in interest and fees. This is a tough situation to be in, as poor loan terms mean you could be in debt for longer and unable to make monthly repayments, with knock-on effects on your business's cash flow.

Grow your business

Having a good credit score creates new opportunities to grow your business.

When it's time to expand your operations, hire that new team member, or launch that new product or service, finance is key for helping your business take that next big step.

A poor credit score puts your business in a difficult position where you could be refused funds, halting the growth of your business.

Future-proof your business

We never know what could be round the corner– the pandemic is a case in point.

Even if your business can meet its current financial needs, what happens if there is another crisis in the future or an unexpected setback?

Having a good credit score will make it easy to access funds whenever you need them, so you'll have peace of mind your business can weather any storm.

Achieve your goals

Good credit, good business.

A good credit score could mean the difference between being stuck in a rut and getting to where you want to be. With a good credit score, money is no object– quite literally– and it provides a stepping stone to achieving your goals.

Do you know your business's credit score?

A good credit score is key to the financial health of your business. Having a good credit score will save you money in the long run, whilst helping you overcome barriers to growth and success. So it's well worth checking your credit score to see where your business stands!


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