Getting business finance isn’t easy even with a good credit rating, let alone a bad one. When you are starting a new business, by definition you have no track record. This is a problem for lenders, who see a successful past as the best indicator of a successful future. Because there are no historical sales or accounts for a new business, they will look to other indicators to assess your track record. They will include your previous experience in the industry, any track record of running another business, and of course your personal credit history.
Your credit rating, along with a report that explains the rating, can be located from several credit agencies, such as Experian, Equifax or Noddle. You should research your report before trying to get business finance so that you are armed with the information. Lenders will certainly run a search, so it’s best to approach them with all that facts.
What’s a bad credit rating?
It’s difficult to give a specific number that constitutes "bad" because the different agencies use different scoring systems, but lenders are looking at negative events on your report: late payments on personal bills or loans, defaults on credit cards, County Court Judgements, and bankruptcy proceedings. All of these things will affect your ability to raise finance. Again, from the lender’s point of view, their priority is to ensure they’ll get their money back. If your track record suggests a history of non-payment, then they may conclude that’s an indicator of future non-payment.
What are your options for getting business finance?
Your chances for getting business finance depend on how bad the credit history is, but there are some options for unsecured borrowing. The government’s Start-Up Loan product is subsidised borrowing for new businesses. Apart from a cheaper interest rate than High Street banks, the advantage of these loans is that they are designed to help people who might not be able to source finance elsewhere. For that reason, some negative credit history is not necessarily a deal breaker.
If you have assets that could be used to give security to a lender, that opens a few more avenues. The most common is property – that may be your home, or a buy-to-let property. By giving a lender a charge on the property, they have security that they can get their money back even if you don’t pay. Of course, that means you could potentially lose your home, and so that’s not a step that should be taken without advice and due consideration.
The type of business you are starting can alter your chances of getting business finance; it may be possible to use invoice finance to help with cash flow. Those companies that deal business-to-business, and have customers who take 30 or 60 days to pay their invoices, can generate cash secured against those invoices. This factoring service can often be made available to new businesses whose directors have a poor credit history, because the lender’s risk assessment is carried out partly on your customers, rather solely than on you.
How can you improve your credit rating?
There are several different things you can do to improve your credit rating. Are you on the electoral roll? Credit agencies use that to help confirm your identity so if you have moved in the last year or two and haven’t registered to vote, get yourself on the roll.
In the short term, you can improve your credit rating by paying off any short term "pay day" lenders, and settling any small defaults or late payments. On an ongoing basis, try to make sure you pay your bills on time – don’t get a bad credit history just because you were a little disorganised and forgot to make a payment!
If your personal finances are particularly bad, you could consider an individual voluntary arrangement (IVA) to help manage the debts, arrange a payment plan, and get back on the straight and narrow. You should take advice from a debt counsellor or an insolvency practitioner before doing that, but it may be the first step on the path to getting your credit history back into good shape and getting business finance.