Ensuring your credit history helps your finance application
Credit scoring is part of the process used by banks and other lenders to help assess whether they will lend to you. Appeals research indicates that a poor credit history is the most common reason for a business owner to be turned down for bank finance
What is not widely known is that your personal credit score can affect your bank’s decision to provide you with business finance. This is particularly true if you are a start-up and only require a small amount of credit. Small businesses with a turnover of less than £25,000 are shown to be particularly affected by problems with their credit history.
Credit Reference Agencies and the information they use
Credit Reference Agencies (CRA) collect and maintain information on both consumer and business credit history in the UK. They look at the five different areas listed below to build your credit profile, allocating points for each piece of relevant information. Points are then adding together to produce a total score. When your score reaches a certain level, the bank will generally agree to your application.
- Payment History
- Total amount of debt
- Time and Length of credit
- Type of finance you have
- Recent applications
The first two will generally contribute the most towards your credit rating. The higher your score, the more easily your application will be accepted.
How to improve your credit score
- Make repayments on time and for the required amount.
- Ensure you are on the electoral register.
- File full rather than abbreviated accounts at Companies House if you are a limited company.
- Stay within your account balance or approved overdraft limit.
- 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.
- 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.
- 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.
- 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.
Because your credit history is so important to the success of your finance application, banks have joined forces to promote better understanding of the issue by producing a helpful guide. The guide suggests several simple ways in which you can improve your credit score, thereby improving your chances of a successful application.