Access to beneficial loan terms relies on your
company operating with a good credit score. A high credit rating demonstrates
to lenders that your business is financially responsible and can pay its bills
and liabilities as they fall due.
This type of affordable borrowing supports
business growth and allows you to make strategic decisions with confidence. So
how is credit reporting used by lenders and what are the potential implications
for your business?
Why is a good credit score important in loan
applications?
When applying for borrowing your business
credit score is used by lenders to assess their level of risk. A medium or high
risk of default will reduce the number of loan products available to you.
Other elements also contribute to a lender’s
decision, including the industry you operate in and the length of time you have
been in business. However, your company credit score does carry significant
weight in their assessment.
Business credit ratings are typically based on
a range between 0 and 100 with an ‘excellent’ credit score generally being 80
or above.
How do lenders use credit reporting in loan
applications?
Overall credit rating
Your business creditworthiness is determined
by how well you have repaid loans, business credit cards, and day-to-day bills
in the past. Other elements of your business credit report are also taken into
account when making a loan application, including credit utilisation and how
often you have applied for lending.
Credit utilisation
Your credit utilisation rate is the proportion
of credit your business uses when compared with the total amount available.
Keeping this below 25-30% is advisable because it can improve your credit
rating.
Number of loan applications made
Making numerous loan applications in a short
timeframe harms your business credit score so it is a good idea to stagger
applications and try to build up your credit rating if you have recently been
turned down for a business loan.
Benefits of a good credit score when making a
loan application
Access to cheaper borrowing
The higher your credit score the greater
access you will have to better loan terms and lower interest rates. This can
save you a considerable sum over the term of a loan and provide affordable
borrowing that supports your business over the long term.
Healthy business reputation
When your business repays its borrowing with
no issues your credit score naturally improves. This, in turn, builds your
reputation for financial responsibility through regular on-time payments and no
defaults. As a result, you can attract more custom and suppliers that trust
your company.
Fund business growth
The favourable loan terms that are typically
available to businesses with a good credit rating facilitate business growth.
This allows you to confidently make strategic plans and help your business to
reach its full potential.
How can you improve your business credit
report?
Regularly checking your business credit report
allows you to make changes where necessary. If your current credit score is
low, for example, you can improve it by various means, including:
• Using
a business credit card for regular outgoings, such as fuel – when you repay
your spending in full and on time each month, you build a better credit score
• Obtaining
professional guidance, tailored to your business, on how credit reporting is
used in business loan applications
• Credit
checking your customers and suppliers regularly – this reduces the likelihood
of bad debts, which can create cash flow issues and jeopardise your business's
ability to pay its bills
Credit reporting is a foundational tool used
by lenders to establish the creditworthiness of businesses. Being aware of how
it is used in loan applications allows you to make improvements where
appropriate and understand when is the best time to apply for a business loan.
Article written by Karl Hodson, UK Business
Finance. Karl is responsible for helping businesses across the UK raise funding
for a variety of purposes such as working capital, expansion and capital
equipment. He has specialist knowledge of raising finance through invoice and
asset-based lending, crowdfunding, loan and equity funds and Government
schemes.