31 Jul 2020
Most of us are all too aware of the importance of good personal credit when it comes to obtaining finance for mortgages, contracts, and credit cards. For small business owners, establishing business credit can be just as crucial.
Even if you’re a solo-led startup running your business from your own home, it’s likely that you’ll have to get business finance at some point in your business’ journey. Before we dive into how to improve a bad score, let’s differentiate between personal and business credit.
Personal credit is based on your personal financial history. Missed repayments, making too many credit applications and even something as seemingly simple as not being listed on the electoral register can have an adverse effect on your personal credit score.
On the other hand, your business credit rating is a reflection of your business’ financial history. It lets the lender know how likely you are to repay the money they lend you. Again, things like missed loan repayments and failed credit applications can bring down a score.
Having good business credit is important as it can influence a lenders’ decision as to whether or not they approve your application. Lenders can look at your credit score when setting borrowing limits, repayment terms and interest rates on finance.
Lenders do this as a way of mitigating risk when they lend to you. It stands to reason that if you have a good business credit rating and have maintained good credit, you have a better chance of being accepted, and borrowing money could be less expensive.
Experian scores businesses from 0 to 100, with 0 representing a high risk and 100 representing a low risk. You should aim for as high a score as possible – the higher your score, the more “reliable” lenders are likely to deem your business.
There are lots of credit score checkers online that you can use to find out what your score is. With Experian, a score of 91-100 would indicate “very low risk” and a 2-15 score would represent maximum risk (1 represents an “imminently failing company”).
When it comes to improving a bad credit score or indeed establishing a good one from the outset, we’d recommend taking the following three steps.
In 2014 ComRes conducted a survey for Experian in which they asked UK financial decision makers about their credit circumstances. Surprisingly, 59% of small companies had never checked their business credit score and out of those who had, 56% hadn’t done so within the previous six months.
In order to identify potential pitfalls early, you should review your credit rating regularly by obtaining credit reports. Credit reports are put together by credit reference agencies. They use publicly available data to create them and the reports make a recommendation on the probability of a loan being paid back on time.
When reviewing your report, keep a lookout for anything deemed “negative”, as well as signs of fraud, identity theft or out-of-date information.
According to figures released by Pay.UK, the company that runs the Bacs Direct Credit and Direct Debit payment services, the UK SME late payment debt rose to £23.4 billion in 2019, up £10.4 billion on the £13 billion owed in 2018.
Failing to pay on time can hurt your business credit score and the recovery time can be lengthy if you miss payments repeatedly. Credit agencies who supply the data pertaining to your business’ financial history will include information about default payments and County Court Judgements (CCJs).
CCJs are court orders that can be issued against a borrower if they fail to repay a debt. Information on defaults will stay on your company’s credit score file for six years minimum.
Be aware that every credit application you make will be visible on your credit report, regardless of whether or not they’re successful. In other words, when a lender rejects your application, it could have a negative impact on your credit score.
You’ll be in for a better chance of obtaining the credit you require if you have a positive cash flow. Strong cash flow will help you to build up your business credit rating as agencies will take into consideration the difference between your company’s current assets and liabilities.
You can use Funding Options to find out what business funding you might be eligible for based on your circumstances before committing to an application. You can rest assured that the quote you receive won’t affect your credit score.
Depending on your situation and willingness to use different forms of security, you could still get a business loan with bad credit. If you have bad credit, it’s always a good idea to speak with a finance specialist to see what your options are.
Traditional banks aren’t always able to offer SMEs finance these days. Fortunately, we’re witnessing more lenders entering the market who are offering alternative lending methods.
See what you might be eligible for today.
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