What Is a Bad Personal Credit Score?
Bad credit is one of those things, very easy to get into and extremely difficult to get out of. So what are your options when your business needs money and you have a bad credit score?
Firstly, we need to understand what a poor credit score is.
Lenders need a credit history to indicate whether you are creditworthy. This dictates whether or not you’re a liability.
Unfortunately, a poor credit score generally indicates that you are a risk and the negative parts of your credit score can affect whether lenders will give you a loan.
Bad credit scores can come from the following:
- Missed payments
- Bad credit utilization
- Late payments
- County Court Judgements (CCJs)
Always keep in mind that it’s not just about borrowing money from the bank and paying it back. Anything you have on credit goes on your credit report. This can be a phone contract, store credit, or a mortgage. So, keeping on top of your payments is vital if you want a clear credit score.
You can even accumulate bad credit by having multiple credit applications. Your credit history has a very fine line between the right and wrong types of credit. You need to owe money to show you can pay it back to build a credit report, but you don’t want everything to be on credit because you leave the door open for missed payments.
Now, what does your personal credit card have to do with a business credit card?
Can My Personal Credit Score Affect My Business Credit Card Application?
If you have a startup or a new business, lenders are far less likely to provide substantial credit because they don’t have anything to base the loan amount on. This means they need to look at the next best thing— your personal credit history.
If there isn’t anything to base the business credit on, the bank needs to ensure you as a personal entity aren’t a risk. Once the bank sees that you have the capacity to pay the money back when it is due, you are more likely to get the money you’re asking for in your business.
However, if you have a well-established company, the bank shouldn’t base your business credit card application outcome on your personal credit. The financial records will speak for themselves.
It also depends on where you go for a loan. Some business credit cards will require a credit check on partners in the company. Not most, but a few will do this.
If you’re unsure of where you or your business stand in terms of credit health, you can check through the leading credit agencies in the UK, such as:
Types of Business Credit
You should also take note, that there are two types of cards:
- An unsecured business credit card means that the credit isn’t secured on business property.
- A secured business credit card is where the bank uses company property as collateral.
Secured loans are generally for start-ups that don’t have any sort of history or credit score to show that the business is a good investment.
But if you don’t have anything to put up as collateral, that’s when the bank takes your personal finances into account. And like with the business credit loan being based on your personal credit score, the business credit can then affect your personal credit score too.
It’s a double-edged sword. You need to build a credit report for your business but you also don’t want to do something that affects your personal credit score.
If you don’t want to go with a secured loan but still want to build up a good credit score then financing from a vendor is a good alternative. Trade credit is when you obtain goods or services on credit and pay it back over time.
Having trade credit can improve your credit score by showing lenders that your business can take out “credit” and pay it back on time and in full.
What Affects a Business Credit Application?
The lender will take a close look at all the finances of the business and possibly its partners. Here is what the bank generally looks at for a business credit card application:
- Any existing credit
- Company credit score
- Ownership details of the business
- Previous credit applications
- Company accounts
- Trade credit
So, while keeping finances in order, you also need to have all this information on hand to provide the lender with everything they need for your application.
Seeing the above, it makes sense why new businesses may struggle to obtain a loan. If these documents aren’t available, the bank needs to look at the person taking out the loan and not the business.
What to Look For in a Business Credit Card
Before you head out to get your new business credit card there are a few things to take note of:
- Research business credit cards: Just like you would research a car before buying it, you need to look at the different business credit card offers available. Some cards are specifically designed for new businesses that don’t have an established credit record. However, the interest is higher and you might need to put down a deposit.
- Interest rates: Ensure that you can cover all the charges that come with having a business credit card. Most have an interest-free period which is perfect if you’re trying to build a credit record. You can borrow the money without incurring any interest if you pay it off every month.
- Penalties: Make sure you know what the penalties are if you are late on a payment or miss one completely. You need to know where you stand so there aren’t any surprises.
- Rewards: Most business credit cards have some sort of perk system. Pick a business credit card that offers the most for your needs. For example, airline miles if you travel a lot for work.
- Features: Your business credit card should fit your needs. For example, if you travel a lot, use a business credit card that doesn’t charge excessive foreign transaction fees.
If you need some guidance, here’s a list of the top business credit cards in the UK.
How to Apply for a Business Credit Card With Bad Credit
If you have bad credit, here are ways to increase your chance of getting approved for a business credit card:
- Get your credit report in order: Before applying, you need to show that the business is in good standing. Try your best to pay off any unpaid accounts and that anything with a debit order is paid on time for at least three months to improve your credit score.
- Research: Try to find a bank that is open to helping businesses with bad credit, just be sure to read the terms and conditions carefully so you don’t sign something you aren’t able to stick to.
- Check your eligibility: Before you set your heart on a business credit card, ensure that your business meets all the requirements before applying. Knowing your eligibility for business credit cards also helps before applying because you want to limit the number of applications made.
- Don’t apply to too many lenders: Making multiple applications can hurt your business credit score. Applying to one or two is enough, then wait for the outcome before looking into other options. Note, every application you make can affect your credit history.
- Check your personal credit score: You may need to sign as a guarantor if you have a new business. If this happens you must ensure that your personal finances are in good standing to increase the chance of getting approved.
- Speak to someone: There is nothing wrong with going to a bank branch in person to get a better understanding of the business credit cards you’re applying for. You may even get a better deal once the bank understands your personal business needs.
If you’re not sure of where to start, this list of startup and new business bank accounts might come in handy in understanding what business banking involves.
How to Improve Your Business Credit Score
Before you start applying, there are a few things you can do to increase your business credit score:
- File accounts on time: Your returns and accounts should always be up to date and updated on time. Late submission often indicates a financial issue to lenders.
- Prompt payments: Wherever you can, ensure that all accounts are paid on time so you don’t incur late charges or fees. This is for all accounts, trade credit included!
- Avoid County Court Judgments: Paying late or not at all could be a cause for CCJ. This is a huge red flag for lenders, so avoid this at all costs.
- Keep on top of partners: If one of your clients or suppliers goes under, your business can be affected if payments aren’t made and the work is already done. Try to keep an eye out for any unpaid accounts and follow up.
- Request a quote: Before you make a credit application, you are within your right to ask for a quote rather than a full credit check. This allows you to see a roundabout offer in black and white before putting your application through.
The best thing you can do to increase the chances of obtaining credit is to show the lender that you can take out a loan and pay it back on time. It doesn’t need to be for a large amount, anything that can show the business is reliable will count towards your application.
The Benefits of a Business Credit Card
After all this, you might be wondering why applying for a business card is necessary, here are just some of the benefits:
- Keeps a clear distinction between personal and business finances.
- Business credit cards usually have a higher credit limit.
- Allows the business to build a good credit report if it ever needs a larger loan for future business growth.
- Keeps all the finances in one place. If you want to track how and where business finances are going, having it all in one account is much easier to monitor.
Bad credit can be hard to get out of, but business credit is vital to most growing businesses that want to expand to bigger and better things.
Can sole traders get business credit cards?
Yes, sole traders can take out a business credit card. However, there is no distinction between the company and the person which can be a problem if there’s a court judgement. The sole trader is seen as the whole business, meaning it remains the single entity’s responsibility to pay the money back.
Are business credit cards the only option for a startup?
No, there are also specific small business loans that might be a better option for a small startup company. They generally offer a higher credit limit for smaller companies. Here is a list of small business loans in the UK.
How long does it take to get a business credit card?
Generally around 7-10 days, but it is dependent on the type of business card you’re applying for and whether you have all the documents on hand when making your application. It may take longer if there are multiple partners than need to sign for the credit card application to move forward.
What is a county court judgment?
A CCJ is when someone you owe money to issues a court judgement. Receiving a judgement means that a court has deemed you liable for the money. You can dispute the claim but generally, if the money is owed you will need to set up a payment plan or change the terms of the original contract. A CCJ unfortunately remains on a company credit report forever.