What you can do about a bad credit rating
There are three main credit reference agencies working in the UK: Equifax, Experian and Callcredit. These firms maintain a record of the relationship between individuals and lenders. Note, not all lenders report to all credit reference agencies. They use their data to provide credit scoring information to lenders.
In the context of business finance Dun & Bradstreet were the main source of credit information, however the other companies are now taking more interest.
It is very important to understand that when you sign an application form for a business loan, such as a commercial mortgage or lease agreement you are usually consenting to credit checks on your company and its principals i.e. the directors.
If anything in your report is out of date or gives a misleading picture of your willingness or ability to repay a loan, it can affect your chances of getting the best deals. It can even lead to outright rejection by lenders.
How does Business Credit Checking work?
Because all commercial mortgages are manually underwritten you can avoid automatic rejection for a loan by being as open and honest as possible. If you are already aware of a credit problem it is far better to offer an explanation at the outset rather than be found out by a credit check.
To understand the difference between a credit score and a credit check it helps to know what information is being recorded on your credit file. Remember, if you are applying for a commercial mortgage and your business has a perfect credit record you could still run into problems if one of the directors has some personal credit issues outstanding.
Credit reference agencies use two main sources for information:
- Public records, such as court judgments, individual voluntary arrangements and bankruptcies. Your credit report also shows whether an individual is registered to vote – lenders use this as a precaution against fraud, to check that you are who you claim to be and live where you say you do.
- Information from lenders and financial institutions, such as records of the number of loans you have and whether you have ever missed a repayment.
Broadly speaking (and this is a very simplified version) a Credit Score will use the information from both sources and come up with a numerical value which is interpreted by the lender’s application process.
A Credit Check will usually only involve a check of the public record information so may not show up missed or late payments. Many of the commercial lenders who lend money to business or individuals with bad credit histories will only carry out a credit check, primarily to check the information provided by the applicant.
Some lenders will carry out a mixture of the two systems, a credit search to check the identity of an applicant and to ensure that they are not bankrupt. But they will also check the lenders information to ensure that there are no mortgage arrears..
Remember, it is always far better to offer an explanation for a credit problem in advance, than to offer an excuse when you have been found out. If you deliberately withhold or conceal information you may be committing fraud.