Credit Scoring Tips
Tips on understanding the Credit Score of your Business
The past couple of years have seen an unprecedented tightening of credit across the UK and every sector has been affected, from mortgage lending to car leasing. But getting access to credit is still relatively easy providing you have a good credit score and choose the right lender for the type of finance you need.
Numerous factors affect the credit score of your business so it’s important to understand these and take action where possible to improve your rating.
Here are the key indicators to look out for:
If you have borrowed in the past then information on the way your account was conducted would have been shared between the banks and finance institutions. Using a system called Delphi the lenders will all have a record of how much you borrowed, how much of it has been repaid and whether or not it was repaid on time. This will include credit cards and any other form or credit agreement such as utility bills and store cards.
Any potential lender will also use Delphi to look at the amount of credit you already have to ensure that your business is strong enough to service any outstanding loans as well as the advance you have applied for.
The date, size and nature of any court judgements or outstanding arrears in relation to the overall size of your business will generally dictate whether or not they represent a major hurdle for your credit application. Even companies like Tesco have CCJs but still have a more than substantial credit limit.
Less well established businesses and those with weak accounts are likely to find that any CCJs make their application fail. We recommend that you declare any adverse history at the outset so a full explanation can be included in your application.
If you have been trading for less than three years then you will find it more difficult to get credit than if you are a well established business and the interest rates you pay will usually be higher.
It’s worth taking this into account if you are thinking of applying for credit and making sure that other key factors such as your profitability, net worth and the credit worthiness of directors are all made as strong as possible to compensate.
The profitability and net worth of your business are two key factors in the underwriting process.
Taking the balance sheet first, for most types of finance you will need a net worth at least equal to the size of advance. So if your business has a net worth of £10,000 (tangible assets of £50K, liabilities of £30K and intangible assets of £10K) it is unlikely you will be advanced £100,000 to buy a new piece of machinery or computer system without some kind of third party support such as a high net worth director or a connected company with a much stronger balance sheet.
Loss making companies will also find it more difficult unless they have a significant net worth or have the support of a strong parent company or director.
Director’s Credit Score
If you have a limited company, then it is quite normal for a credit check to be carried out on the directors of the business as well as the business its self. The logic being that directors with a good credit score will often run good creditworthy businesses.
Although this is an important factor, the covenant of the business itself will be looked at first but in marginal cases a good credit report for the directors could make the difference.
Type of Asset to Finance
Some items are easier to finance than others. CNC Machinery and Construction Plant for instance, because of their relatively strong residual values, can often be financed for young or financially weak businesses. At the other end of the scale, arranging finance to buy or lease computer software or specialist equipment is generally much more difficult.
Number of Credit Applications
Before applying for credit make sure that you are happy with all of the terms and conditions and get some advice as to the chances of it being approved. Multiple credit searches will count against your credit score so avoid them if you can.
On-line credit applications should be avoided until you have discussed the matter in full with the lender and fully understand what you are applying for and how much they will charge if the application is successful.
How you can help yourself
There are a number of things you can do to give your business the best chance of getting credit. The first is to find out its credit rating as well as your own.
Business ratings are available from a number of sources including companies like Dun & Bradstreet or Riskdisc. Personal credit ratings can be checked through the credit rating agency Experian by visiting www.creditexpert.co.uk .
If you see something you don’t agree with that is adversely affecting your rating then take it up with the finance company or bank in question. And don’t overlook factors such as being on the electoral register or paying off credit card bills on time.
Don’t be tempted to take all of your profit out of the business. If you build your balance sheet up over a period of time then not only will you have the financial strength to weather any economic downturn but your business will be much more attractive to potential lenders.
In some cases your finance application will be assessed by a computer using a points system so anything you do to increase the credit rating will improve your chances of success.
Choosing a Lender
Gone are the days when the banks were willing to underwrite all of your business. Likewise the approach taken by most finance companies is now much more conservative and credit limits are generally lower.
We recommend that you don’t put all of your eggs in one basket but op for different lenders according to your specific needs. For example, if you have a business account and overdraught with your clearing bank then it might be prudent not to use their subsidiary company for your vehicle leasing or commercial mortgage.
If you put all of your borrowing with one bank then you might come up against group company limits just at the time when you need their support most. And if your plans are for a series of acquisitions throughout the year, then try and match these with the most appropriate lender.
Why Choose TeleLease
The benefits of using an Independent Finance Company such as TeleLease are considerable.
Starting with you and your business, we will work hard to understand your finances and advise on how best to prepare your application so that there is every chance of securing the finance you need.
We have strong working relationships with a number of different underwriters so can direct your application towards the most appropriate source with the best chance of success.
You will enjoy a one to one relationship with a dedicated account director who will co-ordinate your applications and take full responsibility for delivering the level of service you need.
And there will be no foreign call centres, premium rate numbers or automated switchboards – promise.
If you would like to discuss your asset finance requirements with someone that knows the market then please call or email us today for an informal no obligation conversation.