How your credit score can impact your business finance
What to look out for
- Red Avoid making too many finance applications requiring a hard credit check
- Amber If you have a poor credit score you can still secure finance for your business
- Green You are likely to be offered better interest rates and more favourable terms on credit cards and loans with a high credit rating
Discover all you need to know about your credit score, both business and personal, and how your business could benefit from improving your credit score.
What is my credit score?
If you’ve ever had a loan, a credit card or paid a bill in instalments, you have a credit history. Your history records, among other things, your debts, your total payments and your payment behaviour.
Each time you apply for finance, lenders use credit reference agencies (also known as credit rating providers) to review your past credit behaviour and calculate an overall score.
Your credit score is calculated based on the data and transactions in your credit history and indicates the level of risk you represent to a potential lender.
How is my credit score worked out?
In the UK, credit scores are calculated by three different credit reference agencies: Equifax, Experian and TransUnion (previously Callcredit). Whenever you apply for credit, the lender might request a report from either some or all of the agencies.
Each credit reference agency has a slightly different way of assessing your credit score, but the collated score will be used by the lender to decide if they will give you credit. Your credit score will range from 000 (very low) to 999 (very high). The score is calculated on request and is an ever-changing value, not a set number.
Several different data sources are used to calculate your credit score, these include:
- Application form data: If you make an application for new finance your application form will include personal details and the purpose of the loan.
- Electoral roll information: This includes your date of birth and previous and current addresses.
- Current credit card, mortgage, overdrafts and other loan data: This will include total debt as well as the start and end dates of loan terms and any missed payments. This will also include any bank account held or closed in the previous six years.
- Court appearances and fraud records: Any court appearances you have made relating to debt or bankruptcy will be listed, as will any instances of financial fraud.
- Joint accounts: If you have joint accounts with partners these will be recorded. If your partner has a bad credit score this could affect yours.
- Other loan and credit check applications: Your credit history will record the number of credit score checks requested. If you have made multiple applications for finance in the past, this could affect your score and mean you’re considered high risk.
Your credit score is calculated primarily on transactions from the last six years. However, serious credit and finance irregularities such as fraud, bankruptcies or County Court Judgements (CCJs) will be included in credit score calculations for much longer.
What impact would my credit score have on securing finance?
A high credit rating means you are more likely to be offered finance deals. It’s also likely you will be offered better interest rates and more favourable terms on credit cards and loans.
On the other hand, if your credit score is low you will find it more difficult to secure finance – and if you do it’s likely you’ll be offered high rates of interest to reflect the higher perceived risk.
How do my personal and business credit score differ?
Your personal credit score and business credit rating are different but for some small businesses owners just starting out the lines can be blurred. This is because start-ups often rely on personal finance to get going.
However, it is generally advisable to keep lines of credit separate. For example, if you take out a company credit card, do not name yourself a guarantor as this will link both credit histories if the business is also held in your name.
Can I improve my credit score?
There are ways you can improve your credit score.
Firstly, be responsible with your finances: Make repayments on time, keep your credit card utilisation low (meaning don’t borrow more than 30 per cent of your card limit) and use it frequently and modestly.
Secondly, request to see how your latest credit score has been calculated to make sure there are no errors in the data. You can apply for a credit report from the three credit rating agencies for free. This can also help you check for instances of fraud arising from identity theft. In addition, make sure your details are correct on the electoral roll.
Finally, avoid making too many finance applications requiring a hard credit check (where the check itself is recorded in your history). Some finance organisations offer eligibility checkers that let you calculate how likely you are to receive finance without triggering a full credit check. This is also known as a ‘soft check’.
Do lenders offer finance to business owners with a low credit score?
If you have a poor credit score you can still secure finance for your business. However, you may find the amount you can borrow is more limited and the interest rate on repayments are high as you are perceived as a higher risk borrower.
You may want to consider alternative kinds of finance outside the standard group of loans available. Look into working capital finance options, such as revolving credit facilities. You can learn more in our guide to working capital finance.
What security could I offer to improve my chances of finding finance?
If you have a bad credit score you will find it difficult to secure finance at favourable rates – if at all. But all is not lost – find out more about how you can secure loans in our guide to working with bad credit.
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