Why business credit scores matter

Published by Abbey Watkins on 9 May 2024

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The strength of the relationship a business has with suppliers – and suppliers with their customers – is fundamental to the financial success of those businesses.

It is a relationship defined, amongst many other factors, by payment terms, credit control and, in some instances, offering customers a line of credit. 

But not all businesses are created equal, and it can be difficult to determine how a relationship might develop. For all businesses beginning a new commercial relationship, business credit scores can provide a valuable indicator of how you might want to work together.  

Their value, given the continued uncertain economic conditions with business failures on the increase and businesses often taking longer to pay suppliers, cannot be understated. 

A business credit score is a representation of a company’s financial stability and creditworthiness. These scores are used by lenders, suppliers and business partners to assess the potential risks associated with doing business with a company and should shape payment terms.  

Credit scores are determined by the financial results of the company and certain behavioural traits – do they, for example, file their financial statements on time and do they pay suppliers within agreed payment terms? They are a valuable indicator of creditworthiness and can help a business make informed decisions around the financial relationship they wish to have with a particular business.  

A business with a low credit score might mean the risk of that business failing is greater than one with a high credit score. Here, a supplier may want to think carefully about offering extended credit terms.  

A business with a high credit score, on the other hand, might suggest they are more financially stable and payment terms can reflect that.  

It should be noted, however, that credit scores can change rapidly, so when reviewing payment terms it can pay to recheck a business’s credit score.  

Why consider a full company credit check?

In addition to company credit scores, it is often sensible to consider a full company credit check. This will include the credit scores of a business but will also flag any legal notices against a business, such as a County Court Judgment, that might indicate financial difficulties. 

Every business owner will recognise that a positive cash flow is the lifeblood of a business. Cash that is tied up with customers for extended periods can have a detrimental impact on a business and keeping on top of credit lines and the creditworthiness of customers and suppliers is essential. 

Not every business will pay attention to the credit scores of their customers – or indeed their own credits scores – and that can be a mistake. Monitoring and improving your credit score may enable your business to obtain better supplier terms assisting cashflow and help alleviate the need for interest bearing debt. Understanding the credit scores of your customers may save you thousands by avoiding irrecoverable debt. 

To help monitor and understand how credit scores can help your business, contact our Funding team here.

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