Do You Need a Good Credit Score for a Business Loan?
One of the leading questions you might have when starting out as a business owner is whether you need good credit for a business loan. We have just the answers.
Business loans come in all shapes and sizes, with an array of providers on hand to provide finances to the millions of businesses operating across the UK at present. But you might take a look at your own business affairs and wonder, what do you need to qualify for a business loan?
Additionally, you may wonder, do you need good credit for a business loan? There are so many business loan providers to choose from, but you need to be savvy to the requirements each one may have to ensure that you can boost your chances of finding the business loan that’s right for your business.
This is especially important if your business is young and you’re thinking of seeking a start-up business loan. There are a variety of loans, some requiring not just the assurance of repayment, but also things like collateral, to ensure risks are minimised, as is the case with secured business loans.
For a 360-degree view, read our ultimate guide to business loans.
Credit scores - do they matter?
One of the most important things to have at the front of your mind when looking to grow your business is your credit score, which you need to share when applying for a small business loan or other forms of finance. This comes down to creditworthiness, one of the big factors in determining your small business loan eligibility.
Business loan providers measure the creditworthiness of a business as a means to see what the level of risk would be, and this can be used as a major factor in qualifying for a business loan or not.
Providers of these loans tend to rate your score out of hundreds of points - the higher the score, the lower the risk involved in for them to allow your business to borrow from them.
If they do not disclose specific numbers on credit scores, providers often judge your creditworthiness in terms such as excellent, good or bad. In this case, we’ve used Experian’s credit rating system for simplicity, as it rates scores out of 999 points.
- Excellent credit score
With this kind of business credit score, you tend to have a credit score of 961 to 999. This is exceptionally good and allows you to access the best deals from virtually any provider.
- Fair credit score
Experian considers a score of 721 to 880 as fair - at this level, loans are still accessible, but your options are reduced somewhat, as you’re perceived to carry a higher risk to the lender. Nevertheless, many borrowers find themselves in this category and continue to be able to request a number of different loans.
- Very Poor credit score
Below 560 points and your score is considered very poor, according to Experian. This greatly restricts access to finance as a business, and it’s quite possible that your loan application might be refused. Risk is elevated for the lender, so loans will come with a high cost for your business.
Is there a minimum credit score to be eligible for a business loan?
You might now be wondering, what’s the minimum credit score to get a loan? The short answer is, it really depends who you turn to for a business loan, as there isn’t really a clear consensus shared by providers. Experian is just one of many credit reporting agencies.
By and large, for most credit reporting agencies you who are able to calculate your score, a number around 500 points is usually considered to be on the lower end of the scale, signalling limited capacity for your business to request the full range of loans it might need.
As mentioned before, having an excellent credit score enables you to request most loans on the market, but your choices start to be more limited if you drift into what many providers consider the good credit score range.
If you have a bad credit score, the likelihood of finding a business loan declines. For more information about how to get a loan with bad credit, check out our guide.
That’s not to say you will be frozen out of seeking a business loan from all providers. Fortunately, there are lenders who specialise in providing loan products with a lower than average credit score.
Obviously, they might think twice, if a credit score suggests a business is at risk of failing imminently or has already failed. Nevertheless, providers are willing to offer cash flow, even if your business credit score is potentially risky.
The caveat of low business credit scores
As with personal finances, some providers will show a willingness to provide business loans to you, even if you have what many would see as a low credit score, but only with certain caveats in place.
Your credit score still matters, because the lower it is, the higher the risk involved for both the borrower and the lender. The upside is that you could still be able to qualify for a business loan.
The main caveat, if you have a bad credit score, is that you’re likely to be expected to pay higher interest than other borrowers. This can be stressful, as it incurs greater costs for your business, especially if you’re trying to avoid losing money needlessly.
In some situations, prevention can be better than a cure. But if you’re already stuck with a bad credit score, and wish to improve it to reduce the costs of seeking a business loan, check out our guide on how to fix your business credit rating today.
Checking your business credit score
If you’re unsure about where you stand with regards to your business credit score, it’s possible to find reporting agencies who can review them for you.
It’s important to remember that some of these agencies might charge you for requesting a proper credit check, so prepare yourself for added costs, when seeking an accurate score.
Any hard credit check you make as a business at any time goes straight into your credit history. Repeated or failed attempts to check it can have a negative impact on your credit score, and risk making your business appear like it has an unsustainable attitude towards credit.
Multiple loan applications that fail might ultimately make providers reluctant to provide you with cash flow to borrow.
A sign of a healthy business is one that appears more financially stable, and less reliant on borrowing. Although you should avoid seeking credit checks too frequently, it is important to seek a business credit check before making an application for a loan.
Resolving a bad credit rating
If you wish to resolve issues with your credit score, it’s important to make sure all your information is as up-to-date as possible so you know what you’ll be dealing with.
Once you have a good idea of how high or low your business credit score is, you might wish to start by acquiring a fresh credit report. This gives a much-needed assessment of your situation and, if it’s thorough enough, it could give you indicators for where there is room to improve.
Time is money and paying bills late can have a knock-on impact on your credit score. Late invoices can not only leave a mark on your credit score - you might start to develop a reputation as a business that can’t be relied upon to have the money when it’s required. Missed payments might even result in penalty charges, especially if a credit card is involved.
A simple way of resolving this issue is to make payments on time. Paying things ahead of or on time helps to improve your standing and can do much to improve your credit score.
A County Court Judgement (CCJ) is to be avoided at all costs as it can do much damage to your business credit score. It might be issued by a supplier creditor or contractor in order to resolve a payment issue.
A CCJ can remain on your record for up to six years, affecting your chances of attaining a business loan in the meantime. This is because it gives providers a warning that you might be a distressed business, unable to make payments on-time.
While it is still possible to seek a business loan despite poor credit scores, some of the things we have outlined above are integral to ensuring your credit score remains in good condition.
If you have any further queries, including how to qualify for a business loan and much more, make sure to check out our business loans FAQs, to learn all you could possibly wish to know, especially about how to qualify for a small business loan today.
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Peter reports on a number of areas in the personal finance sector, with a particular interest in supporting businesses and individuals in the UK services industry. Read more