Prepare your business for bank financing

Credit rating and scoring

Guide

Most banks have a system for checking a business' credit rating and score before deciding to lend money. If you understand how this system works, you may be able to tailor it to your advantage.

Credit scoring

Credit scoring calculates the statistical level of risk for a loan based on the information you provide, information from other agencies, and a sample of accounts similar to yours. These samples are obtained from the lender's own records or from credit reference agencies. This comparison is then used to generate a total 'score'. This score can determine whether you are accepted, or if you are accepted, it could determine how much you are loaned.

For large amounts, banks tend to rely on credit scoring, though they may consider other factors as well - eg your income and existing commitments, any security offered or their previous experience with you.

Credit scoring does not single out any specific item as a reason for rejecting an application, so you may not be able to identify exactly what the issue was.

Credit rating

A good credit rating is vital if you are seeking funds or want good terms for trade credit. It is therefore important to know your credit rating, and if necessary take steps to improve it.

Credit ratings are based on various things, including:

  • previous credit performance - whether you have kept up to date with loan repayments or stayed within overdraft limits
  • the key financial indicators of your business - eg liquidity, solvency and profitability
  • whether your accounts are filed on time
  • whether you or your business have had any adverse County Court judgments
  • your trade payments record

You can do a number of things to improve your credit rating, including:

  • making sure credit reference agencies have all the relevant information about you
  • filing accounts, change of directors and other statutory requirements on time
  • filing full rather than abbreviated accounts if possible
  • reviewing your business capitalisation regularly
  • retaining profit within your business - to show a commitment to the future
  • maintaining a good trading relationship with your suppliers

There is no guarantee that your application for finance will be successful - credit scoring systems vary between finance providers and you may be accepted by a lender that has different acceptance criteria.

If you have been refused finance for any reason, there may still be finance options available to you - see non-bank finance and business financing options - an overview.