Common Culprits: What Can Cause Your Business Credit Rating to Plummet?

What Can Cause Your Business Credit Rating to Plummet? A business credit rating, like a personal credit score, can drop due to various factors and financial behaviours. Unlike personal credit scores, it can also drop due to external factors and influences outside of your control. Understanding these factors is crucial for businesses to maintain a […]

September 11th, 2023

What Can Cause Your Business Credit Rating to Plummet?

A business credit rating, like a personal credit score, can drop due to various factors and financial behaviours. Unlike personal credit scores, it can also drop due to external factors and influences outside of your control.

Understanding these factors is crucial for businesses to maintain a healthy credit rating. A healthy credit rating influences the terms suppliers will offer you, the cost of borrowing and even how successful you may be tendering for a contract.

Here are some common reasons that can cause a business credit rating to drop:

Late Payments: Consistently making late payments on business loans, credit cards, supplier invoices, or other financial obligations can significantly impact your credit rating. Lenders will notify credit agencies of missed payments or where payment was made late. .
High Credit Utilisation: Using a significant portion of your available credit limit can negatively affect your credit rating. High credit utilisation can suggest financial strain and as such may reduce your credit score. It is a proven assumption that high utilisation of credit comes before a default.
Closing Credit Accounts: Closing credit accounts can affect your credit utilisation ratio and the length of your credit history. If you close older accounts, it may shorten your credit history, potentially lowering your credit rating. Adversely, keeping dormant accounts open can have exactly the opposite affect.
Legal Actions: Legal actions against your business, such as judgments, liens, or bankruptcies, can have a severe and long-lasting negative impact on your credit rating. These actions indicate financial instability and an inability to meet obligations. Remember that legal action isn’t just about recovery of debt, it includes disputes over contracts or non performance, it isn’t always financial.
Inaccurate Information: Errors or inaccuracies on your business credit report can result in an undeserved drop in your credit rating. It’s essential to regularly review your credit reports and dispute any discrepancies. This is far more common than most realise. Remember that loads of companies have very similar names and it is easy for something to be wrongly attributed to your company.
Frequent Credit Inquiries: Too many credit inquiries within a short period, especially if they result from applying for multiple loans or credit cards, can negatively affect your credit rating. These inquiries can be seen as a sign of financial distress.
Changes in Business Structure: Changing your business’s legal structure, such as from a sole trader to a limited company, can sometimes lead to changes in your credit profile and may temporarily affect your credit rating. The same happens with a change of registered address, resignation of a director or material change in shareholding.
Lack of Business Credit History: A lack of established credit history can result in a lower credit rating. If your business hasn’t built a track record of managing credit responsibly, creditors may view it as higher risk. Makes sense.
Economic Downturn or Industry-Specific Challenges: External factors, such as economic downturns or industry-specific challenges, can also impact your credit rating. If your business sector faces financial difficulties due to these factors, it can lead to a drop in creditworthiness. This is often driven by your SIC code and how performance across your sector is seen, it can have nothing to do with anything your business has done.

To maintain a healthy business credit rating, it’s essential to practice good financial management, make payments on time, and regularly review your credit reports for accuracy.

Building and preserving a strong credit history can provide your business with access to better financing options and better supplier terms.

By Dave Farmer

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.