You would be surprised to know that some of the biggest names in business have had some first-hand experience in near, or total bankruptcy. To name but a few: Alan Sugar, Donald Trump, Duncan Bannatyne, and Richard Branson.
If a whiter-than-white credit history was an essential requirement for setting up a new business, many entrepreneurs would have been forced to throw in the towel. Thankfully, having a slightly tarnished credit past doesn’t have to detriment your startup. But that is not to say that your history can be brushed over — not least when you’re seeking a cash injection.
Before you apply for a loan, you need to ensure you know every last detail of your credit history. This means being able to answer questions like:
- What is it?
- How can you improve it?
- What are your options if it’s deemed ‘bad’?
Our guide will help you answer these questions: fully preparing you to apply for and secure a loan.
Credit history and business loans: what’s the relationship?
From signing up for broadband, to moving into a new flat, credit checks are standard procedure in any regular or large transaction. Applying for a business loan is no different. Each bank has its own criteria for approving business loans — a process that involves putting your loan application and your credit history under close scrutiny.
Where your new business doesn’t yet have any significant assets to put up as security, you’ll almost certainly be asked to personally guarantee repayment. For this reason, the lender needs to ensure you’re a safe bet, with a solid and reliable credit history. This means, even though it’s a business loan you want, your personal credit history is very much the bank’s business.
How do I avoid a bad credit rating?
Get hold of your credit history file
The starting point is to see what you’re dealing with. Do this by getting hold of the same information that lenders will be basing their decision on. There isn’t a central ‘official’ credit register in the UK, rather lenders tend to request reports from at least one credit reference agency. What shows up on one report may not necessarily be on another, so get hold of reports from at least two of the three credit reference agencies: Experian, Equifax, and Callcredit.
Deal with any errors and active defaults
If you spot a mistake, whether it’s a simple clerical error or perhaps even evidence that a third party has been involved in fraudulent activity in your name, report the problem to the relevant agency and provide evidence in support. Once it’s rectified, it’s worth checking that all three agencies have updated their records accordingly.
Your research may alert you to the presence of legitimate credit default entries that you’d either forgotten about or were completely unaware of. For instance, if you moved house and missed a series of reminder letters. If this is the case, you should try and stem your losses by contacting the companies you owe money to, explaining the situation, and arranging to make repayment.
Prove yourself worthy of credit
If you’ve lived a credit-free life so far, it becomes more difficult for would-be lenders to gauge the likelihood of you keeping up with repayments. You can address this by obtaining a credit card. Use this for purchases for at least several months, while paying your monthly bills on time. Avoid making any cash withdrawals. You’re likely to incur charges for this, regardless of whether you repay in full each month. Some lenders will see it as an example of poor cash management.
On the other end of the scale, if you have multiple credit cards to your name, this can create the impression that you’re overly reliant on credit. Before you apply for a loan, carry out a cull by cancelling all those cards you rarely or never use.
Providing you have a solid loan application, one or two minor defaults on your credit file are probably not, in themselves, going to scupper your chances of acceptance. In contrast, a consistent pattern of past defaults is much more likely to deter would-be lenders. Either way, you can help your chances of acceptance if you try and explain yourself by filing a ‘notice of correction’ under individual entries on your credit report. Each credit agency has a procedure for this. It takes the form of a brief explanation (up to 200 words) of why the entry exists. This is ideally with details of how the issue was resolved.
Not successful? What are the alternatives?
Rejection doesn’t automatically mean your business is unworthy of credit from all possible sources. It simply means that you haven’t met the specific criteria of that particular provider. There may be other ways forward, including:
This is suitable for those who are looking for a small amount of money to act as a buffer against temporary cash flow problems. By approaching your current bank and requesting an overdraft, you could obtain just enough money to fulfil your business needs.
The government could also be a potential source of cash inflow for your business. The start-up loan scheme aims to help entrepreneurs get their business ideas off the ground. Applications for the loan are open to businesses that have been trading for less than two years. The amount given depends on what you will use the money for, and what type of business it is.
Has the bank overlooked the growth potential of your business? Private investors in the form of business angels or venture capital firms may take a different view. So do not be afraid to approach them for financial support, or an initial bulk investment.
This includes methods of obtaining small, individual amounts of money which accumulate into a substantial amount of money. You may obtain this from large numbers of people (crowdfunding), from other businesses, or business-leading individuals (such as peer-to-peer lending).
For an up-close look at alternative finance, and advice on how to attract investors, browse our help centre to find out what your options are.