London leads the way for growth but risks abound
by Rory Traynor
During the course of operating a business, you may find yourself at the mercy of lenders when looking to borrow funds, applying for credit or financing a purchase. The lender will decide whether to extend credit to your business and how much, based on numerous mitigating factors. While some of these are out of your control, there are a handful of reasons that are within your control which can increase your chances of a successful application.
When undergoing an assessment for creditworthiness, lenders will investigate your appetite for borrowing, attitude to lending and general behaviour towards handling company finances. If your business is newly founded and therefore has a limited credit history, the lender may extend their investigation to cover your personal credit history.
Unforeseen or hidden issues can often block your application for finance and hinder your chances of securing an opportunity to grow your business. Sharon McDougall, a Scottish personal debt and Debt Arrangement Scheme expert looks at how lenders assess credit risk and what potential complications to look out for.
How do lenders assess credit risk?
When lenders assess credit risk, they seek to view a 360 angle of your business at all points in time. A thorough credit risk assessment is essential for such decision-making as it protects the lender from extending funds to high-risk applicants with a history of failing to protect the financial health of their business.
From defaulting on loans to overborrowing and underpaying, we look at common issues that businesses must take heed of to protect their financial position and up their chances of a successful finance application. Here are some of the factors that lenders will consider when judging your creditworthiness.
Credit history – Your credit history is a timeline of events relating to historic borrowing, including common red flags, such as late payments, loan defaults or County Court Judgments (CCJs). It illustrates your habits when it comes to accessing credit and exposing your business to credit risk.
Debt-to-income ratio – Lenders will assess your true ability to afford loan repayments by tracking how much income enters your business, and what proportion of this is earmarked to settle company liabilities and cover existing debt repayments.
Your debt-to-income ratio provides insight into whether you can realistically carry the burden of additional debt. If your business is cash-poor and debt rich, this is a common red flag that will deter lenders from approving your application or extending the full value of the credit line requested.
Repayment ability – Your repayment ability will be determined by the likes of the debt-to-income ratio and the value of the collateral that can be used as security. How much you can physically repay will determine how much you’re able to borrow. If your debt-to-income ratio is already at its limit, this will raise a red flag to lenders.
Security – To secure competitive terms or access selected lending facilities, you may be required to put up security to protect the lender in the event of non-repayment. While this can unlock access to a wealth of products, this option may only be limited to asset-rich businesses, or businesses with a greater appetite for risk. If you’re already committed to several secured lending lines, this will also shape the lender's decision.
Credit usage – While you may have access to existing credit, the upper limit may only be reserved for an emergency, or accessed as a final resort. If you regularly use the full credit lines available to you, this shows the lender that you’re heavily reliant on the cash which may mean that your company has poor or unreliable cash flow. This also means that you’ll need to factor in existing repayments which may be substantial.
In addition to accessing additional funds, credit checks may also be carried out by new suppliers or businesses that you wish to enter into business with, therefore, it’s crucial to build a strong credit record and reduce the likelihood of incurring a red flag.
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