Telling the truth about SME life today

Why Your Business’ Credit Score is Failing You

Thousands of small to medium-sized businesses (SMEs) up and down the country are facing significant financial hardship. Inflation is at a record 40-year high, and the cost-of-living crisis is putting extra pressure on business owners. For many, just staying afloat is now a real challenge.

The fact that the UK’s 5.6 million SMEs make up over 99% of the businesses in the economy makes this an even bigger issue. More than one in 10 small business owners think there is a strong possibility that they will go out of business within the next 12 months. And three in five suffer from sleepless nights worrying about this.

For many small business owners, access to credit is a necessary part of business management, such as easing cash flow processes. And in today’s economic climate, many are turning to credit to weather the storm. Sadly though, accessing credit can be hard. This is because when it comes to SMEs, lenders put in place strict lending rules based on company age, size or turnover because they have limited information on business cash flow. Businesses therefore often have no way of understanding how and why decisions are made about them by financial lenders. And as a result, many owners have been denied access to financial support as lenders are unable to build a clear and accurate picture of their finances, particularly if they haven’t been trading for long. We only need to look at traditional business credit scoring to see this in action.

Like individuals, businesses too have their creditworthiness scored to be accepted for a loan. Also called commercial credit scores, business credit scores work very much like personal ones. Banks and lenders use them to make informed decisions about the risk a business presents when it applies for a loan or a financial product. In short, a business credit score may affect whether a business’s application for a loan will be accepted, and it could also impact the rates it will be offered.

But there’s an issue with traditional business credit scoring. In the UK, credit bureaus, or credit reference agencies, work with lenders to help them make decisions about whether a business applying for credit is likely to pay it back. While this is based on looking at the amount of debt an SME owner or an SME has within the financial system, for companies, it is also common to look at the most recent filed company accounts. However, these accounts usually reflect finances from 12 or 18 months earlier, meaning this picture of debt only tells one side of the story of a business’s financial health. This results in inaccurate business credit scoring, and as a result, thousands of financially healthy SMEs are rejected by lenders from accessing the funds they need.

There is also the problem that business owners do not have access to this credit score and therefore cannot understand what they need to do to be approved. Research suggests that 50% of SMEs that are turned down for funding do not go on to apply elsewhere. This broken process stifles growth in the economy, it’s painful for business owners and lenders alike and must be nipped in the bud.

Credit bureaus on their own lack the appropriate data to generate the most accurate credit score for an SME. But by leveraging open banking – whereby third-party financial service providers securely access banking transactions and other data about an individual or business from banks and financial institutions – lenders have the tools to take additional factors into account when assessing risk and creditworthiness, including real-time financial data like consistent loan repayments. When combined with information obtained via traditional methods, analysis is much more complete. Ultimately, lending decisions are enhanced because they’re based on a broader data set. And with that comes a wealth of opportunities for previously underserved businesses. Now, through the power of open banking, both established and new lenders are developing digital capabilities based on real-time data made available, such as credit decisioning and risk scoring.

Our offering, Credit Passport®, utilises open banking to reflect an up-to-the-minute picture of a SMEs financial health, structured around international banking standards. To make it easily understandable not just for lenders but for business owners too, it’s mapped to an instantly communicative A++ to E colour-coded rating. This enables SMEs to both learn about and improve their financial health, build resilience and understand how the financial system operates. Businesses can also monitor their score to ensure they’re always aware of where it’s at, ensuring they’re ready for lending or growth opportunities. By uniquely putting the credit score at the beginning of the funding application process, and with a rich 360-degree view of data that Credit Passport® derives from open banking, business owners are presented with funding offers that they are eligible for and have a very high chance of achieving. We now have 30,000 directly registered SMEs and provide connections to 20 different lenders.

With increasing headwinds in the UK economy, many businesses will be starting contingency planning around their finances to effectively navigate this challenging economic environment. Ensuring business owners can view, understand and stay on top of their company’s credit score will be vital in helping them demonstrate financial resilience, and ensuring they are well placed for growth and any unexpected future challenges. Lenders must also harness the power of open banking so that they can make more informed decisions on a business’s creditworthiness using the most up-to-date insights and data. In doing so, they will be able to lend to more businesses than they would have done previously, without increasing their risk appetite.

The information gap between lenders and business owners must continue to be bridged, and SMEs must be empowered to build and demonstrate their financial health. The future of British business depends on it.



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