24 June 2013

Business funding: know your credit rating

Experts are reminding business owners of their right to appeal funding decisions, as banks are penalising small businesses based on their personal credit ratings, a new report has revealed.

The report by the Independent External Reviewer of the Business Finance Taskforce’s appeals process found start-ups and small companies are often being turned away automatically by lenders due to personal credit scores.

Professor Russel Griggs said on some occasions companies are rejected for business funding without banks even taking a proper look at their business plan.

Funding rejections can be overturned

The study shows that almost four out of 10 bank loan rejections are overturned after companies appeal to the Business Finance Taskforce, which was established in 2010 to try and help small businesses secure funding to help them expand and grow.

The Federation of Small Businesses says the high level of successful appeals suggests banks need to make improvements to their internal systems.

More than half the applications for business loans of less than £25,000 which are rejected, are turned down on the basis of poor credit scores.

Prof Griggs says credit ratings do not necessarily give lenders an accurate idea of whether someone is suitable to run a business, because they are based on a large number of personal factors.

He cites the case of someone who was starting a business in the hospitality industry and was refused a £20,000 overdraft due to his credit rating. However, it emerged that the only reason the entrepreneur had a poor score was because a finance broker had carried out numerous credit searches when he had bought a new car a few months previously.

But Prof Griggs adds: “I am not criticising the way that banks stratify their businesses, as there is no other way economically to do it.”

Banks are under pressure

He says lenders are under pressure from the Consumer Credit Act to protect borrowers wanting loans of less than £25,000, meaning sole traders and very small businesses are being treated in the same way as consumers.

He adds: “In many cases, and especially for start-ups, it is the individual who is judged first and not the business.”

Prof Griggs now wants to enter into talks with the Financial Conduct Authority to ask them to come up with new guidance to separate small businesses from consumers.

And he is urging lenders and financial advisers to make sure people running a small company understand the negative effect their personal credit scores can have on applications for business funding.

He warns: “The vast majority of overturns occur because the business owner can easily explain something, often daft things, shown by the credit score. Business owners need to prepare for the meeting with the bank so they’ve got the explanation if a credit report does throw something up.”

Since the appeals process was launched two years ago, 5,500 businesses have appealed against lenders’ decisions to refuse them funding. And the loan rejections which were overturned on appeal have led to companies securing more than £30 million.