If you are looking to secure finance for your business, you may be wondering what requirements lenders have and whether your personal credit score will have an impact. Business lending is very different from personal lending, and the regulation around commercial lending is substantially different.
This means lenders evaluate your business in different ways and will not always consider your personal credit score. Often, lenders will consider the credit scores of directors before reaching a decision, especially if the lender requires a director’s guarantee.
Let’s learn more about rebuilding your credit score for business growth.
Does My Personal Credit Score Impact My Business?
The answer is it depends. There are a few factors lenders consider when extending borrowing to businesses.
Primarily, they will want to view the company accounts and ensure there is adequate cash flow within the business to cover the cost of the loan. They may also ask for company account bank statements and a letter from your accountant to outline projections for your current business year.
Some businesses can borrow money on this basis alone, and lenders may feel the accounts are good enough to reduce their risk of lending. However, in some cases where accounts are borderline or there is little to no accounting history, lenders may want to find out more about company directors, including credit checks.
What is a Credit Score?
A credit score is a score allocated to every individual in the UK by a credit reference agency. Credit scores reflect your risk to lenders if you borrow money.
A good credit score will indicate you are creditworthy and low risk to lenders, whereas a bad credit score will denote a higher risk. Lenders will often tailor their lending products to your credit score, and those with bad credit will often encounter higher interest rates.
Most lenders in the UK operate a threshold or cutoff when offering financial products. If your score falls below this threshold, a lender will decline the loan altogether.
How is a Credit Score Calculated?
Your credit score is calculated using various metrics, including whether you are registered to vote at your address, how you have managed previous financial commitments, and your current financial position.
For example, you could have an exemplary credit history but have too much borrowing on your credit file currently. This might then lead to a high impact on your credit score, and it may drop below the lender’s minimum credit score thresholds.
It is important to keep up to date with your credit score and ensure all information on your credit profile is correct. If errors go unnoticed, they can have a significant detrimental impact on your score and prevent you from borrowing money when you need to.
Of course, businesses operate differently from personal finances. Your creditworthiness as a business can also be impacted by how your company is set up.
If you are borrowing money as a business, you will find it easier if you are set up as a Limited Company (Ltd). This is because creditors will apportion the debt to the company and recover any outstanding money from business profits and assets.
Limited Liability Partnerships (LLPs) complicate business lending as each partner has a legal limited liability for the company finances. When LLPs seek funding, it is common for lenders to credit score the directors.
The Role of Directors in Businesses
As a company director, you have a level of financial responsibility that goes above and beyond non-company directors. Companies House has guidance on your financial standing and expect company directors to meet these standards. Likewise, lenders also expect company directors to be in good financial standing, especially if the business is looking to borrow money.
A common practice in the commercial lending sector is for financial institutions to request director’s guarantees. These guarantees go above and beyond a basic credit check and lenders ask directors to put up collateral against their borrowing.
The most-used director’s guarantee is a lender requesting the director put their house up as collateral for the business loan. This means if the business is unable to repay the debt, a lender can repossess the property to cover the debt.
Be cautious when entering into a director’s guarantee agreement. There is a reason business is separated from personal finances as there is an inherent risk involved for company directors. Director’s guarantees may reduce the risk for lenders, but they significantly increase the risk for directors and muddy the waters between business and personal finance.
Improving Your Credit Score
Ultimately, as a company director, it is important you maintain good financial standing both for your personal financial situation and the long-term future of your company.
Credit reference agencies provide comprehensive advice about how you can improve your credit score, including:
- Registering to vote at your home address,
- Clearing down any problem debts,
- Reducing the amount of existing debt.
Even if you have a fair or good credit score, there are always steps you can take to improve your credit score and improve the chances of securing finance when needed in the future.
Bad Credit Finance and Businesses
A bad credit comparison website has just been launched in the UK (the first of its kind). The website allows borrowers with bad credit get pre-approved for a diverse range of financial products without hard credit checks.
It also allows you to compare interest rates to secure the cheapest loans for your circumstances. Credit builder loans can help you build your credit score, providing you repay the loans in full and on time.
Whether borrowing money for personal or business situations, you should only do so if you have a need to borrow. Borrowing money for the sake of borrowing can cause further problems with your credit score, especially if the debt builds and becomes unmanageable.
Always borrow money for your business or personal life responsibly.