Ensuring your credit history helps your finance application
A low credit score or poor credit history is one of the most common reasons why a business owner is turned down for bank finance, according to research into declines and appeals. So what is a credit score and how can you strengthen yours?
When you apply for an overdraft, loan or other form of debt finance, your bank or lender will use several pieces of information to decide whether (and how much) to lend to you.
These include the information you give in your application, your relationship manager’s knowledge of your business, and the history of how you have managed your business and personal bank accounts. In addition, they will look at both your business and personal credit scores using data held by Credit Reference Agencies (CRAs).
Many entrepreneurs don’t realise their personal credit scores can affect a lender’s decision about whether to offer business finance. This particularly affects new businesses, with less of a track record, and those with a low turnover or minimal assets that could otherwise be relied on for security.
Who decides on your score and how?
Credit Reference Agencies (CRAs) collate information about people and businesses. Lenders draw on this information to help decide whether to offer credit. Your business’ credit score doesn’t only affect whether a lender can offer you finance, suppliers may check it when deciding whether to sell goods or services to you and on what credit terms, if any. In addition, if you are tendering for contracts your potential client may look at it when deciding which supplier to award a contract to. It’s important to understand what affects your credit score and do what you can to improve it.
What affects your business credit score?
1. Your payment history: whether you pay your debts or invoices on time (including utility bills, suppliers, rent and rates and taxes).
2. Your business’ balance sheet, how much debt you owe, and the length remaining of any credit agreements.
3. Whether you have exceeded overdraft limits or breeched credit agreements.
4. Keeping your business filing up to date (eg filing your annual return and business accounts with Companies House on time).
5. Court records eg any County Court Judgements (CCJs) against your business, any other debt orders, and whether you are within a Company Voluntary Arrangement (CVA).
6. How often you have applied for credit in the past, especially recently.
What affects your personal credit score?
1. Whether or not you are on the Electoral Register.
2. Your payment history to credit card, loan and mortgage firms, plus your account behaviour for your bank accounts and any energy and mobile phone contracts in your name.
3. Court records eg County Court Judgements (CCJs), individual voluntary arrangements, bankruptcies and other court debt orders.
4. Previous applications you’ve made for credit.
5. Addresses you are linked to and people you are ‘financially linked’ with.
How to improve your credit score
1. Ensure you are on the electoral register.
2. Check your personal credit files with all three consumer CRAs (Experian, TransUnion and Equifax).
3. Stay within your account balance or approved overdraft limit.
4. Make all invoice payments on time and for the required amounts; if you cannot always communicate in advance with suppliers.
5. Make personal and business credit repayments on time and for the required amounts.
6. Both Experian and The British Business Bank suggest filing full rather than abbreviated accounts at Companies House if your business is a limited company.
7. Always file your accounts (and your annual return and company tax return) on time.
8. Keep your information up to date. If anything changes (eg your registered office address) notify Companies House promptly.
9. Use your business bank account as much as possible to highlight your turnover. For example, don’t pay business receipts into your personal bank account.
10. If you’re looking for a loan, ask lenders for quotations until you find the right deal. Only then should you apply. This minimises the impact on your credit score.
11. Avoid making several applications over a short period of time. This results in ‘multiple searches’ showing on your credit record, which could adversely affect your credit rating.
12. Confirm how much capital you need and when you need it by. Then outline any security you can offer, how you will repay loans, and the prospects for investors or lenders. You should also estimate cashflow, profit and loss, and sales forecasts – ideally with the assumptions they’re based on.
There is no guaranteed way – or quick fix – to improve your business credit score, and different credit reference agencies have differing approaches to calculate your score. It’s important to understand what can affect it.
You can also read this helpful guide which covers what you can do if an application for finance is declined (including if the reason is the result of adverse data held by a credit reference agency).