Does your personal credit rating affect a business loan application?
One of the questions we've been asked on multiple occasions is about the link between personal credit ratings and securing business finance. We're no finance experts... but we have managed to get the expert input of someone who is.
In this piece, contributed by Sho Sugihara who is is the CEO of credit building app Portify. Portify's technology has pioneered a way to assess creditworthiness in real time. The app partners with Credit Reference Agencies to improve peoples credit scores.
Sho answers the question for us about what impact your personal credit history might have on a business loan application.
Over to you, Sho
As a business owner, access to finance at a fair rate can be the difference between your firm succeeding or failing – without financing, you might not even be able to get your business off the ground. So, what if you’ve got bad credit personally? Despite your business being a separate entity to you it is run by you, therefore a poor credit history may impact your chances of securing a loan. This is the same if you are a sole trader or the owner of a limited company looking for commercial finance.
What are credit scores and why do they matter?
A credit score is essentially a number that signals your creditworthiness to lenders. The higher your credit score, the less risky you are. Credit Reference Agencies decide your credit score. A credit reference agency (CRA) is an independent organisation that collects and stores financial data about you for the purpose of helping lenders decide whether you should be approved for financial products like credit cards, loans or mortgages. Each CRA has its own numerical scale that they use to assign you a credit score, which signals to lending institutions how financially responsible you are.
Your credit score determines if you get approved for:
- Credit cards
- Unsecured personal loans
- Home mortgages
- Auto financing
- Gas & electricity accounts
- Mobile phone contracts
- Flat rentals
Does personal credit history matter for limited companies and sole business owners?
When applying for a business loan, providers can check two types of credit history: your personal credit and your business’ credit. Even if your business’ credit history is good, your personal credit history may prevent you from being approved for a loan. Around one in ten SME owners get turned down for a loan from a bank or building society according to Cambridge and Counties bank research.
There are some slight differences between a sole trader and the owner of a limited company.
A business credit history will look at how the finance of your business have performed. It’ll cover when you paid your suppliers, how many times you’ve applied for a loan for this business and what accounts your business has in its name. The more information you have on your credit file the bigger your ‘credit footprint’ is.
As a limited company, you may have more information on your business’ credit file. This is natural for an established business, you’ve probably been in business for longer and it’s likely you’ll have a larger ‘credit footprint’ due to your interactions with other individuals and businesses. This means that a lender will probably focus on your business’ credit history rather than the owners. However, this does not mean a lender will not check your personal credit history too.
As a sole trader, a lender is more likely to look at your personal credit history just as much as your business’. There are two reasons for this. Firstly, your ‘credit footprint’ is likely to be smaller than a limited company, secondly, your personal finances are likely to be closely intertwined with their business finances. This means that for sole traders it is probably more important that their personal credit score and history is strong before applying for a business loan.
What Credit Reference Agencies are there in the UK?
The UK has three main credit reference agencies: Experian, Equifax, and TransUnion. Each of the big three CRAs collect and hold information on you, but there are inherent differences between the three that you should know about. It’s true that everyone in the UK essentially has three different credit scores because the three companies do not use the same credit scoring system.
Experian claims that over 8 million people regularly check their credit score for free using their online services. While Experian is certainly one of the most well known credit scoring companies in the UK, they do things a bit differently. This includes using a vastly different credit scoring system than Equifax and TransUnion.
Score range: 0-999
What is a good Experian score?
0-560 Very Poor
As one of the “big three” consumer credit reporting agencies, Equifax collects credit information from 800 million individuals and 88 million businesses worldwide. Here’s how Equifax breaks down their numerical credit score values:
Score range: 0-700
What is a good Equifax score?
- 0-279: Very Poor
- 280-379: Poor
- 380-419: Fair
- 420-465: Good
- 466-700: Excellent
According to TransUnion, the majority of UK residents don’t know how their credit score is used, and about 50% have not viewed their credit report in over a year.
What’s a good TransUnion score?
Score range: 0-710
- 0-550 – very poor
- 561-565 – poor
- 566-603 – fair
- 604-627 – good
- 628-710 – excellent
Thanks so much, Sho. So in essence, yes – your personal credit rating can affect a business loan application. And whether you’re planning on applying for any business finance or not, it’s good practise to be aware of your personal credit record and either to build it or maintain an excellent score.