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9 min read

Does your credit rating affect you getting commercial finance?

18 April 2017
Written by Jason

Having a good credit rating can affect everything from applying for a credit card to buying a house. But it can also affect the lines of credit in your business too. We take a look at how your personal credit rating impacts upon your ability to get commercial finance.

Whose Credit Score Counts?

Whether you are buying a computer from PC World or if you are seeking a small business loan, your credit history is going to be checked.

How it is checked will be different to whether you are seeking finance as a sole trader, as a partnership or for a limited company.

If you are a Sole Trader then it is highly likely that your personal credit history will be equally as much your business's credit history. They are going to be considered one and the same. So it is important to ensure that your personal credit score is both protected and improved where possible.

For Partnerships it works in much the same way as for a sole trader, except both of your personal credit records are checked and examined prior to any lending to your business. Even if you have an impeccable credit record, you may not qualify for a business loan due to the bad credit of your partner. It can be a bitter pill to swallow.

If you run a Limited Company it will have a business credit score of its own. But that doesn't preclude lenders from checking up on the personal credit records of the business's partners and directors. That score though represents the risk that you pose to either non-payment or financial security. It also impacts on the size of credit account that you might qualify for.

According to credit risk company Graydon, whether you are a sole trader or run a company of up to 20 employees your personal credit history is going to be evaluated alongside their business credit score.

In all three cases your personal credit score counts.

The Difference Between Personal Credit and Business Credit

A personal credit score is usually found somewhere between 300-800, the higher it is the better, (700 tends to classed as good). Whereas a business credit score is rated between 0-100, again the higher the better.

Your personal credit score consists of all those late credit card payments, missing payments, loan agreements, mortgage payments and everything about your past financial behaviour.

Every time you apply for a new financial product, it will show up on your credit file. This information comes from banks, credit card companies and store cards.

It is usually an accurate record of when and where you have borrowed money and whether you repaid it on time. It will also include any CCJs, IVAs or bankruptcies you have received or gone through.

However it won't include your salary, your student loans, criminal record, parking or driving fines, any savings you own, or your medical history.

Your business credit score measures the creditworthiness of your company. It is based on your business's financial history including loan applications, credit accounts, loan repayment history and supplier payment times.  

With a good credit score your business will find it both easier to get business finance and higher credit limits as well as securing lower rates of interest. A poor credit score - through missed payments, or perceived poor financial health - will be unlikely to have loan applications accepted, and will almost certainly impact on the interest rates offered.

While being able to view your personal credit score, which is usually offered free, viewing and accessing your business's credit score will require a paid for service from a business credit file company.

Why Your Credit History Is Important?

Unfortunately, if you want to try and grow your business, at a time when your personal credit history has issues, then you are going to find lines of business credit difficult to access.

Your personal credit decisions will have had huge impacts upon your business's ability to borrow money and your score is calculated as follow:

  • Previous credit performance
  • Current level of debt
  • Time of credit
  • Types of credit
  • New credit.

The two most important aspects of your credit score are the previous credit performance and your current level of debt.

Banks, despite calls to make them more open to lending to small businesses, still don't like doing so. It means that your personal credit record becomes more important than ever when trying to secure business funding.

This means for instance that if you decided to open a business account you will need to pass a credit check before they offer you one.

Because the banks have an ever-decreasing pool of cash they are willing to lend out to business customers, it means that their criteria for lending it become more strict.

Every lender has their own specific lending requirements and your  personal credit score is just one way in which they can assess how well you can handle money.

According to financial theory an increase in the risk of lending credit means that a 'risk premium' is added to the price. The lower your credit score, the higher the premium added and therefore the higher the offered interest rate.

Growing Your Business With Bad Credit

If you do have bad debts or poor credit then you should be doing something about it. As we have discussed your personal finances are nearly always (in part) linked to and will affect your business finances.

Step: 1 Get Your Personal (and/or Business) Credit Report

Your credit report will clearly show:

  • Existing accounts
  • repayment history
  • Credit applications
  • CCJs and bankruptcies
  • Available credit on your accounts
  • Your financial associations (joint accounts etc.).

Now that last one is important, as it shows the financial links you have with both your family and your business partner(s).

Step 2: Look for any false data

If you have any information on your credit record that is erroneous, then you need to get them taken off as soon as possible. Sometimes it might show small balances outstanding on loans and credit cards that you thought had been settled.

Step 3: Communicate with creditors

For any outstanding debts and missed payments that you may be looking to dispute, get in touch with the relevant creditor and open up dialogue with them. They may be mistakes, either on your or their part.

Step 4: Ensure that your credit file is consistent

There are three main credit reference agencies in the UK: Equifax, Experian and Callcredit. Underwriters can use one or all three, so it’s important that all three say are consistent with each other.

Understanding Business Loan Underwriting and Bad Credit

Having a bad credit history can be damaging to your chances of securing a business loan through a bank because poor credit equals too much risk. And it doesn't matter how much you protest either, the banks will have their criteria, and rarely do they change their mind over matters such as bad credit.

But there are business loans available for those with bad credit.  The only question is, are they going to be right for your business?

Most alternative lenders will offer a business loan to those with bad credit, even if their loans aren't labelled 'bad credit loans'.

Loans are routinely arranged that are not agreed upon due to the value placed on credit rating scores but more specifically with underlying reference to revenue, gross sales, business performance and projections

The bottom line here is that a bad credit rating shouldn't preclude you from growing your business. There are plenty of alternative lenders using alternative - or at least more modern - underwriting techniques to base their lending decisions on:

  • Softer data
  • Decisions based on current performance
  • Analysing 'big data'
  • Using the business's reputation
  • Customer reviews
  • Social media impact.

Your personal credit score is important, either as a sole indication of your ability to handle money or in conjunction with your business's credit score. It can be used to calculate your level of funding as well as influencing your interest rate.

However, even Experian is recognising that many creditors are starting to move away from using personal credit scores to judge a business's financial stability considering that a personal credit isn't always an ideal predictor of business behaviour. Some are even taking advantage of 'blended' scoring tools to utilise both personal and business scores in predicting risk.

Access Commercial Finance offer small business funding for businesses with bad credit. Where traditional lenders may see your business with a dogmatic credit scoring criteria, which doesn't take into account your current or future financial performance.

Originally published Apr 18, 2017 9:38:25 AM, updated April 18 2017
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