How do I get my business credit worthy?

Cashflow is the lifeblood of any businesses, especially in the current post lockdown economy and while a majority of business owners are likely aware of the basic fundamentals of how their lending requests are assessed by lenders, it is likely that there are many factors which are still overlooked.

This article is designed to help a small business with ensuring their business is in the best possible position when applying for finance, whether it is a small loan for an asset or a larger loan for a property:

Criteria A – Your business needs to be able to afford to repay the loan

This may sound obvious but isn’t always the case.

As a minimum, your business needs to be able to demonstrate from produced annual accounts and management information, that it can afford the annualised loan repayments.

A good broker will know that there are ways to calculate the serviceability of a loan repayment, the most common being EBITDA (earnings before interest, tax, drawings and amortisation). This enables a business to reduce their profits effectively while still ‘adding back’ figures to demonstrate that the business can afford the repayment required.

Other lines on the accounts which may be added back to demonstrate serviceability of a loan are current rent paid (if moving from a rented premises to a freehold) or even pension contributions to a director (which can be put on hold if required).

While I would never expect a client to complete a full assessment of their lending request, it certainly would help them present a case to a lender if they were able to demonstrate that their business could actually afford to repay the proposed loan. There is very little point in applying for finance if your business is loss making and struggling to make their current monthly commitments.

Criteria B – Ensure your credit history is accurate and clean

In an increasingly technology driven marketplace, the importance of credit history is growing and growing. While it may be obvious that County Court Judgements (CCJs) are likely to rule a client out from being accepted for finance, other factors can also appear on a clients credit history which may either lead to a declined decision or reduce the pool of lenders available to them.

This includes late payments, a negative net worth or late filed accounts as well as defaults and even the sector which the business operates in.

There are many websites which can be used to check your business credit history. I recommend that a business owner subscribes to one of them to ensure that the details are accurate and up to date.

It’s also important to mention that, despite us focusing on business lending here, personal credit history is still of great importance. No matter how well run your business is, if a director has multiple CCJs in their personal name (or even linked to their address in any way) this can lead to a lender very much getting cold feet. It can also cause great embarrassment and strain to a business relationship if an adverse credit history is revealed when applying for finance.

As with businesses, there are a number of monthly subscriptions available for individuals to check changes to their credit history with a majority of lenders using Experian or Equifax which are affordable options.

Criteria C – Have your information up to date

Nothing frustrates a broker or lender more than continually chasing a client for information which they should, as a business owner, have available at their fingertips. I would always recommend that business owners are always on top of the following, and even more so if looking to raise some finance:

  • The last filed set of trading accounts
  • The latest monthly management information
  • The last 6 months of business and personal bank statements
  • An up-to-date aged debtors and creditors list
  • An accurate cashflow forecast for the next 12 months

The above information will usually always be required by a lender and it’s vital that as much of it is available as quickly as possible when applying for any form of commercial finance.

Every form of funding requires different information, so the above tips are very ‘broad brush’. It is likely that a property purchase will require proof of a deposit so proof of this will be required.

I would always recommend that a client has their professional advisors on ‘red alert’ when considering a purchase as it is likely that a Solicitor will be required for a property deal and an Accountant may be needed to provide further information, albeit this is less likely for a small working capital deal.

James Blacklaws
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James Blacklaws

James, an ex-banker, is a highly experienced and fully Independent Commercial Finance broker, authorised and regulated by the FCA. With whole-of-market access, he sources funding and business loans for those wishing to buy commercial premises, or those looking for funds to develop their business. James offers a personal, one-stop-shop approach to funding solutions. He is always on hand when you need him. He specialises in helping businesses declined by their banks; businesses looking to grow, survive and purchase commercial property.