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How to build business credit when your personal credit rating is poor

From the right short-term loans to utilising existing revenue, we look at the different methods for establishing business credit regardless of your personal rating

Establishing business credit is key to raising finance and ensuring a smooth start-up journey.

But when you already have have bad personal credit, this can be an extremely frustrating experience.

Personal credit is based on your personal financial history. It can be damaged by recent missed loan repayments, multiple credit applications, missed bill payments and even not being on the electoral register.

A business credit rating is based on your business’ financial history and acts as an indicator to lenders of whether you’re likely to repay your loans. Your business may have a bad credit score because you have missed loan repayment or have made a number of failed applications.

A bad credit history will suggest that you’re a high-risk borrower and make it hard to access loans.

So how can you establish business credit with bad personal credit?

The first step is to apply for a credit report so you can see your credit score. Then you can start to formulate a plan to build your business credit.

There are a number of credit report agencies (CRAs) that hold a credit file on you. They have a statutory obligation to provide you with a copy for £2.

A credit report details your:

  • Available credit and existing account
  • Repayment history
  • Any bankruptcies or court judgements against you
  • Whether you’re on the electoral roll
  • Any recent credit applications
  • Anyone you’re financially associated with (things such as a joint bank account or mortgage)

But what do you even do with this credit report once you’ve got it. Peter Tuvey from Fleximize says you should audit it.

He says: “When assessing these reports, it’s important to pay attention to items in the ‘negative’ category and to keep an eye out for signs of outdated information, business fraud or identity theft.

“It’s important to note that each credit bureau has a unique formula for calculating scores, and each lender will look at different types of data so maintaining several of these online credit reports will prove beneficial for your business.”

Form a company

Officially forming a limited company is the first step to building business credit as it legally separates any personal debt you may have from your business finances. Likewise, bad business credit shouldn’t impact your personal credit rating.

You can set up your limited company with Companies House through a formations agent. You’ll need a completely unique name in order to be officially declared as a limited company.

You’ll also need:

  • A company address
  • At least one director
  • At least one shareholder
  • An SIC code which identifies the nature of your business

You can find out how to register a company name here.

Get a secured business credit card

Wondering whether you can get business credit cards with no credit check? Or a business bank account with no credit check?

Well, the answer is yYes, and using one is a good way to build your business credit.

A business credit card is one issued to a limited company or sole trader rather than an individual. Like consumer credit cards, your business is given a credit limit, with a minimum amount to be paid back every month.

Staff can make use of them without the hassle of submitting expenses and it’s a good way to keep track of company spends.

Generally, a business credit card will have a withdrawal limit of £500 a day and a annual fee of £32. You can negotiate a significantly higher credit limit than you can with a personal credit card. Typical business credit cards have a spend limit of around £1,000.

Fleet credit cards

Business fleet fuel credit cards can be used by your mobile workforce to pay for petrol and diesel on the road.

The deposit for a fleet credit card is lower than for a business credit card making it a more accessible option for a small business.

As there’s a record of all fuel card transactions, they can also reduce admin and improve fuel efficiency by providing detailed information on usage. They can also be linked to particular vehicles and are safer than carrying cash.

Supplying your fleet workers with fleet credit cards is a great way to build business credit as well.

Learn more about small business fuel cards here.

Trade finance

Trade finance is basically a short term loan of credit from one business to another business.

It can be used to plug the trade cycle funding gap where an exporter may need to mitigate the risk from the importer, whilst the importer needs to mitigate the supply risk.

An importer may prepay for goods and the importer’s bank can provide a letter of credit to the exporter’s bank.

For a business with bad credit this can help to improve your payment record and borrowing reputation.

Revenue finance

Revenue-based financing, or royalty-based financing, is a form of finance where investors receive a percentage of the enterprise’s gross revenues in exchange for lending your business capital.

Unlike equity finance, the lender does not gain a controlling stake in the business. As it is primarily based on your company’s bank deposits and other bank data, rather than your credit score, it is a good way of raising finance when you have low credit.

Using revenue finance can help you to improve both your business credit and your personal credit.

Top tips for building good business credit

To finish up, Tuvey shares his top tips for improving your business credit score:

  • Think carefully about when you apply for credit – according to the Fleximize founder, every credit application you file will be noted on your credit report, even if these are unsuccessful. Every rejection can damage your credit history. “Credit agencies also take into account the difference between your current assets and liabilities, so having a positive cash flow means a higher credit score”, he adds. A good cash flow suggests a more ‘creditworthy’ business
  • Focus on paying creditors on time or early – make repayments on time and pay your accounts off early to show you’re a sensible borrower. “Credit utilisation is likewise taken into account when applying for credit, so avoid using more than 70% of the funds available in your account”, advises Tuvey
  • Use lenders that report to credit reference agencies – a good payment history can help to boost your business credit if your lender reports to credit bureaus. Banks tend to report to credit agencies, but it will be difficult to secure this type of loan with a poor credit rating. Enquire in advance whether they report to credit agencies
  • Be wary of county court judgements – “you can get a county court judgement (CCJ) or high court judgement if someone takes court action against you for money they believe you owe them”, explains Tuvey. Make sure to settle a CCJ registered against you within 28 days to ensure that the judgement is cancelled and will not appear on your record. “Unpaid county court judgements appear on your register for up to six years, so avoid this at all cost”

Why establish a good business credit score?

To conclude, Tuvey explains why it’s not just investors who will appreciate a good credit score.

“Building good business credit can help you attain a lower-interest small business loan or business credit card, not to mention better terms from suppliers.

“If you prove yourself trustworthy, it could even attract new customers to your business, given the public nature of business credit scores.”

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  1. I haven’t found any secured business credit cards in the UK. Can you recommend any known companies?