We helped family-run Lancashire business Minerva Crafts get the funding they needed to expand their warehouse

Credit ratings

Credit ratings and credit scores can be split into two categories: personal and business. They’re often used by lenders assessing a finance application, and while they can be important, they’re just one piece of the puzzle for building up the bigger picture of a business or a person. Here’s an explanation of some of the key terms.

What is a credit score?

Whenever you borrow money or are extended another form of credit, the details are recorded by a credit reference agency. Whether it’s something big like a mortgage or something small like your phone bill, any time someone lends you money (or lets you pay later) it is added to your credit history.

There are three credit reference agencies in the UK: Equifax, Experian, and Callcredit. They hold confidential credit data about you including details like your current and previous addresses, how many accounts you have had in the last few years, long and short term credit usage (e.g. business credit cards), and whether you’re on the electoral roll.

There are lots of different aspects that make up a credit history, and each credit reference agency has their own way of doing things (and different ways of turning this information into a score). But the fundamental idea is that when you apply for finance, the potential lender can ask one of these credit reference agencies for information about your credit history. This is known as a credit check.

Credit checks

Credit checks are a normal part of the process when you apply for a business loan or another type of finance. They give the lender an overview of your situation, but there are lots of other factors involved too.

When you decide to formally apply for finance with a lender, they will have to run a credit search on the business, and often the individuals involved too. The problem is, these ‘hard searches’ appear in your credit history, and can negatively affect your score if you have too many in a short space of time.

A hard search isn’t a problem if you’re accepted, because it’ll be the only one — but if you’re not accepted, the first credit check might make it harder to get finance with your second choice, who will see the previous hard search. That’s where ‘soft searches’ come in.

What is a soft check?

Soft searches are designed as an easy way to check eligibility without affecting your credit score. They’re like a full credit search, except the lenders won’t see them in your credit history and they don’t affect your score.

In a nutshell, a soft search can give you a strong indication of which products you’re eligible for — but because they don’t leave a ‘footprint’ that lenders can see, soft checks reduce the chances that you apply to the wrong thing and potentially hurt your credit score.

Will you credit check me?

We won’t credit check you if you open a finance enquiry and see your funding options. However, if you decide to go ahead with a specific lender, we’ll ask for your ‘permission to search’ in our Terms and Conditions.

We do this because lenders will normally run a credit check as a standard part of their application process.

We may offer you the option to ”check eligibility” for a specific product, which involves a soft check that won’t affect your credit score — but this step is entirely optional.

Personal credit history

A personal credit rating is essentially your personal track record of paying agreed debt — in other words, how creditworthy you are as an individual. It details information about you from a variety of sources such as the electoral roll, court records, and accounts you have with banks and utility companies.

Many people know what their credit history means because they’ve needed to give ‘permission to search’ to a credit card company, their landlord, or even their mobile phone provider.

If you’ve had problems paying back creditors in the past, this information may be on your credit history. Essentially, lenders will often want to see your credit history to know how reliably you’ve paid back other parties in the past, before agreeing to lend to you themselves.

Business credit rating

A business credit rating is similar to a personal credit score, but is more variable between the different companies that compile them. Credit check firms have different methods of scoring businesses, so each score can be different — this is also the case with personal credit scores, but to a lesser extent.

The most important factors for a good or bad business credit rating is how up-to-date your accounts are, how solvent your business is, and whether or not you pay suppliers on time. As with personal credit scores, lenders look into this information to better understand the risk of lending to your business.

Blended score

Sometimes credit reference agencies will look at both a business and a person like the company director to come up with an overall credit score that combines both — this is sometimes known as a ‘blended’ score. This would take into account elements of both the personal and commercial ratings to give the lender an overall picture of lending to that director and their business.

Blended scores can be more predictive than a personal or company credit check alone, because they show the lender an overall picture of behaviour of that person and their business.

For example, if a director has a good personal credit history but the business is struggling, the lender might suggest a personal guarantee. On the other hand, if business is good but the director has had financial difficulties in the past, secured lending like asset finance might be what lenders prefer.

Will a bad credit score stop me getting finance?

Credit checks are one of the many ways lenders assess your case. While they’re important, credit histories aren’t necessarily make-or-break for your finance application — but they’re one of the things lenders use to build up the bigger picture.

If you or your company has a bad credit history, it can still be possible to find a lender that’s right for you. You might find that alternative finance options like asset finance, merchant cash advances, or invoice finance are a perfect fit for your business.

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