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What is a business credit rating and why does it matter?

Written by: James Piper, Founder and CEO, Lightbulb Credit
5 min read

Knowing and understanding your business credit rating is more important than ever. James Piper, Managing Director of Lightbulb Credit, explains why this is and what factors may impact it.

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Maintaining a good credit rating is a key part of running a successful business. 

It shows investors, potential partners and suppliers that you are managing these outward-facing ratings and also have a good track record of paying suppliers on time. 

We sat down with James Piper, Managing Director of Lightbulb Credit, to find out more about what these ratings mean, and why they are so important. 

What is a business credit rating?

A business credit rating works in a very similar way to your own personal credit rating. Simply put, a business credit rating highlights the probability that the business will be able to pay its debts as they fall due. 

Credit agencies, such as Creditsafe, Experian, and Equifax, gather information from a variety of sources to create a financial picture of your company. This is presented in the form of a score from 0/100 to 100/100. Scores closer to 0 represent the highest-risk businesses that will struggle to make their payments, and those higher up the scale indicate the lowest financial-risk businesses. 

Yet, whilst the importance of personal ratings is commonly understood, most company owners and directors don’t know their company credit ratings. Knowing, understanding, and being able to improve your credit rating is now, with the current economic climate, more crucial than ever. 

What affects your business credit rating?

When it comes to your business credit rating, there are different factors involved that can impact it. One of the most influential factors is your history of paying your bills on time. This not only involves your utility bills, but also your supplier invoices and contractual financial obligations such as leases. 

Getting in the habit of paying all your business bills in a timely manner can avoid any negative impact on your rating. 

Other important things that contribute to your credit rating include:

  • The financial standing of the last filed accounts

  • The amount you currently owe suppliers, funders and other liabilities the company has 

  • Your payment history with suppliers, funders and your bankers

  • Whether you file your accounts on time and in line with guidelines

  • The sector in which the company operates

  • The number of times you’ve applied for credit previously 

If you have a low credit rating, then it could impact your ability to achieve your business goals. This is because it affects essential aspects of running your business, including:

  • Your access to finance, and the rates your company pays 

  • The terms you get from your suppliers

  • Your ability to successfully tender for work

Let’s look at these in a bit more detail. 

Access to finance, and the rate you pay

Business credit ratings are used by nearly all funders. A stronger rating will allow your company to get access to credit more easily, since it shows lenders that you’re more likely to stay on top of your payments. A weak rating can make it more difficult to access the finance you need to achieve your business goals. 

This especially impacts SMEs, as they tend to borrow amounts where providers often use automated or algorithmic decision-making tools for their approval process. This makes the credit rating a critical and deciding factor in whether they receive the funding. 

Knowing your company’s rating before you apply for funding seems like an obvious thing to do, given its importance. However, too often business owners only pay real attention to their ratings following a rejection in their funding application. That’s why it’s important to be proactive in understanding and strengthening your rating. 

Not only does your rating impact your access to finance, but also the interest rate your company pays on it as well. Having a good business credit rating can give you access to loans with lower interest rates. On the flip side, companies with weaker ratings may only be offered higher rates, which can increase your costs and affect your ability to grow. 

This is especially significant given the recent turmoil in interest rates, with the Government having now raised them to their highest point since 2008. The speed at which this is impacting levels of funding acceptance, and the rates now offered to companies, makes knowing your credit rating even more important. 

The terms you get from suppliers

Your company’s credit rating will also directly impact the working capital within your business. This is because suppliers will likely run a business credit check before entering into supplier or contractual agreements with new clients. 

Suppliers often use one of the main agency portals to decide whether they are happy to supply goods/services to you on credit terms. 

The terms you set with suppliers can have a huge impact on your ability to deliver consistently to your customers, so building a trustworthy relationship with them on terms you’re both happy with is fundamental. Having a strong credit rating can certainly help.

Ability to tender for work 

If your company tenders for work, it’s pretty much guaranteed that a credit report will be run on you during the tendering process. This takes place within the vetting process for companies considering the suppliers bidding for their contracts. Contract awarding bodies see this as part of their supplier validation process – especially given the current economic backdrop.

If your business has a credit rating that’s below the threshold that the company deems fit, then you’re unlikely to be successful in securing the contracts you want.

Credit ratings for your Limited Company are important. If you want to access funding, seek investment, or start new supplier relationships, then having a healthy credit score is vital for your business. 

If you want to find out your company’s credit ratings, check out Lightbulb Credit’s free credit insight report. They offer companies help in understanding their ratings, and how to gain access to the best terms possible. 

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Founder and CEO
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I am incredibly proud to be the CEO of Lightbulb Credit, the only company in the UK that checks credit profiles across all key rating agencies: Experian, Creditsafe, Equifax, Dun & Bradstreet and Red Flag Alert. We provide unique insight and solutions for businesses of every scale, supporting our clients to achieve more with an enhanced credit profile.

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