If you run a small business but don’t yet have a business credit card, then maybe it’s time to consider getting one.
In many ways, business credit cards work just like personal credit cards. You’ll spend money on your business credit card to cover the day-to-day costs of running your business and, as you spend, your balance (what you owe) will increase.
Just like a personal credit card, if you don’t pay off your business credit card in full every month, you’ll be charged interest on what you still owe.
Used responsibly, there are plenty of advantages to taking out a business credit card. As well as allowing you to separate your personal and business finances, business credit cards can be a quick source of flexible credit.
Business credit cards can also help with cash flow, and some lenders even offer access to loyalty points, incentives, or other rewards as you spend. You can choose to give business credit cards to your employees as well.
In short, life with plastic can be fantastic.
But one of the main advantages of taking out a business credit card is the possibility to improve your business credit score. Read on for the details.
Can a business credit card boost your credit score?
In case you didn’t know, your business has a distinct credit score – separate from your personal credit score.
Your business credit score is a measure of the perceived risk of lending to your business. It’s affected by various factors, including how long you’ve been trading, your history of credit enquiries, how many credit lines you currently have, and your history of making payments and repaying debts – whether you’ve always paid back business loans on time, for example.
Basically, your business credit score tells lenders how reliable your business is as a borrower.
Assuming you use your business credit card responsibly and maintain a low balance – or, even better, pay off the outstanding balance in full every month – using a business credit card is likely to improve your business credit score.
Think about it this way: every month you use your business credit card, you’re borrowing money from your lender – and every time you pay off the balance in full and on time, you’re repaying that loan and proving you’re a reliable borrower. That’s good for your business credit score.
And as your business credit score gets better, you’re likely to see further benefits down the road, including easier access to business loans and other forms of finance.
What Is a business credit score?
Your personal credit score is a measure of how creditworthy you are, and your business credit score is exactly the same thing, just for your business.
Your business credit score is affected by various factors, including your credit history, whether your business is registered with Companies House, and whether there are any County Court Judgements (CCJs) against you.
A low credit score indicates that your business is perceived as a riskier bet for lenders, while a high credit score indicates a lower perceived risk of lending to your business.
Having a strong business credit score will help you in all sorts of ways, allowing easier access to small business finance – and potentially allowing your business to borrow at better rates.
The opposite is also true: a poor business credit score could mean you have to pay more to access business finance, increasing your overall costs and restricting your business borrowing options.
Can a business credit card harm your business credit score?
Just as using a business credit card responsibly can boost your business credit score, be warned that if you misuse your business credit card or fail to make timely repayments, your business credit score could be adversely affected.
You may also experience a drop in your business credit score if you make lots of credit applications in a short time, if you fail to pay invoices promptly, or if you’re late in filing your company accounts and tax returns.
Does a business credit card affect your personal credit score?
When you apply for a business credit card, your prospective lender might carry out what’s known as a ‘hard inquiry’ to look at your personal credit score. As a general rule, lenders are more likely to pay attention to your personal credit score if your business is a start up or hasn’t been trading for a long time.
These inquiries from prospective lenders can temporarily hurt your credit score. They are different from the ‘soft’ inquiries which occur when you check your own credit rating, for example, and which don’t affect your score.
Depending on your arrangement with your business credit card lender, your lender may also report information about how you use your business credit card to consumer credit reference agencies, such as Experian, TransUnion, and Equifax.
This could also impact your personal credit score – although this practice depends on the specific lenders and is more likely to occur if you’ve been missing payments on your business credit card.
How can I check my business credit score?
Credit scores are maintained and held by credit reference agencies, such as Experian, TransUnion and Equifax. Each bureau uses its own algorithm to determine a score for each business or person on their records.
If you visit a credit reference agency’s website, you should have an option to check your business credit score.
While you can check your personal credit score for free, the major credit reference agencies will charge a fee if you want to check your business credit score directly.
With Experian, for example, you can register to check your business credit score for £24.99 (plus VAT) per month, although Experian is currently offering a three-month free trial.
If you check your business credit score with a credit report agency, rather than with the credit reference agencies directly, it may be cheaper or, in some cases, free.
How can I improve my business credit score?
Your business credit score is a numerical rating of the creditworthiness of your business, based on various factors.
This score is likely to be affected by:
- your business payment history
- whether your business has any outstanding debt
- how much of your available credit you’re utilising
- how long you’ve been in operation (and how long you’ve had access to credit)
- whether your business has access to a mix of credit types (like loans and credit cards)
Since your business credit score determines the ease of accessing business finance – and since a better credit score improves your chances of accessing credit on better and cheaper terms – you should be proactive about managing and improving your business credit score.
One way to improve your business credit score is by taking out and responsibly using a business credit card.
You can also take the following steps to improve your chances of gaining a strong business credit score:
- Pay promptly: Payment terms count as a source of credit, so make sure you always pay your invoices on time. If you neglect to settle your accounts with suppliers or make late payments, this can have a negative impact on your business credit score.
- Use a business bank account: Opening and regularly using a business bank account will demonstrate your turnover. Lenders will look at this when evaluating your creditworthiness.
- File your accounts and returns on time: Submit your company accounts and self-assessment tax return before the deadline, since late filings can suggest to lenders that your business is having financial difficulties.
- File full accounts: Limited companies have the option to file abbreviated accounts at Companies House. Your business credit score will benefit from you filing full accounts instead.
- Limit your credit applications: If you repeatedly apply for credit over a short period, this could appear as if you’re struggling or desperate to secure funding. Lenders, in turn, will look on this as a potential red flag. If you want to know more about what a lender can do for you, ask for a quote rather than applying directly for credit.
- Keep enough money in your account: Make sure your account is always topped up with enough funds to cover any outstanding payments. Alternatively, ensure your approved overdraft limit covers what you owe.
- Check your details: Make sure your customers, suppliers, and Companies House have the correct location and status information for your business. If you move premises or if anything changes, be sure to notify all relevant parties as soon as possible. Failure to do so may make your business appear outdated or unreliable and therefore harm your business credit score.
- Keep track of customers and suppliers: It’s worth occasionally checking the business credit scores of the other firms you work with. If one business fails, it could have a knock on effect which harms your business. Being one step ahead of everyone else could make a difference.
- Avoid County Court Judgements: This is an obvious one, but County Court Judgements will count against your business credit score. If you do find yourself with a CCJ, make sure you pay it on time.
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