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How is credit reporting used in loan applications?

Written by Cedar Rose | Nov 28, 2023 5:00:00 AM

 

Access to beneficial loan terms relies on your company operating with a good credit score. A high credit rating demonstrates to lenders that your business is financially responsible and can pay its bills and liabilities as they fall due.

This type of affordable borrowing supports business growth and allows you to make strategic decisions with confidence. So how is credit reporting used by lenders and what are the potential implications for your business?

Why is a good credit score important in loan applications?

When applying for borrowing, your business credit score is used by lenders to assess their level of risk. A medium or high risk of default will reduce the number of loan products available to you.

Other elements also contribute to a lender’s decision, including the industry you operate in and the length of time you have been in business. However, your company credit score does carry significant weight in their assessment.

Business credit ratings are typically based on a range between 0 and 100 with an ‘excellent’ credit score generally being 80 or above.

How do lenders use credit reporting in loan applications?

Overall credit rating

Your business creditworthiness is determined by how well you have repaid loans, business credit cards, and day-to-day bills in the past. Other elements of your business credit report are also taken into account when making a loan application, including credit utilisation and how often you have applied for lending.

Credit utilisation

Your credit utilisation rate is the proportion of credit your business uses when compared with the total amount available. Keeping this below 25-30% is advisable because it can improve your credit rating.

Number of loan applications made

Making numerous loan applications in a short timeframe harms your business credit score so it is a good idea to stagger applications and try to build up your credit rating if you have recently been turned down for a business loan.

Benefits of a good credit score when making a loan application

Access to cheaper borrowing

The higher your credit score, the greater access you will have to better loan terms and lower interest rates. This can save you a considerable sum over the term of a loan and provide affordable borrowing that supports your business over the long term.

Healthy business reputation

When your business repays its borrowing with no issues your credit score naturally improves. This, in turn, builds your reputation for financial responsibility through regular on-time payments and no defaults. As a result, you can attract more custom and suppliers that trust your company.

Fund business growth

The favourable loan terms that are typically available to businesses with a good credit rating facilitate business growth. This allows you to confidently make strategic plans and help your business reach its full potential.

How can you improve your business credit report?

Regularly checking your business credit report allows you to make changes where necessary. If your current credit score is low, for example, you can improve it by various means, including:

  • Using a business credit card for regular outgoings, such as fuel, when you repay your spending in full and on time each month, you build a better credit score
  • Obtaining professional guidance, tailored to your business, on how credit reporting is used in business loan applications
  • Credit checking your customers and suppliers regularly reduces the likelihood of bad debts, which can create cash flow issues and jeopardise your business's ability to pay its bills

Credit reporting is a foundational tool used by lenders to establish the creditworthiness of businesses. Being aware of how it is used in loan applications allows you to make improvements where appropriate and understand when is the best time to apply for a business loan.

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Article written by Karl Hodson, UK Business Finance. Karl is responsible for helping businesses across the UK raise funding for a variety of purposes, such as working capital, expansion and capital equipment. He has specialist knowledge of raising finance through invoice- and asset-based lending, crowdfunding, loan and equity funds and Government schemes.