Personal Credit Issues Impacting on Bank Decisions to Lend to SMEs

An article in the Daily Telegraph has recently highlighted how small business loan applications are often rejected by banks based on the directors personal credit, potentially damaging small business cash flow.

Figures published in a recent report by the FSB indicate that lending to start up and micro SMEs is being judged harshly based on a business owners personal credit score. The effect of this is that viable businesses are being turned away automatically before a business plan has even been looked at and discussed. The individual, and not the business is being judged first. The main point here, is that a directors personal credit score can only be a partial indicator of their ability to run a business. Surely it is better to judge the whole.

Figures show that of the rejected loan applications up to £25,000, a massive 58% of these were due to failed credit scores on the part of the directors. Coming way behind in second and third were the quite reasonable reason of Affordability (19%), and Account conduct (12%).

The good news is that there is an appeals system people can turn to. The bad news is that no one has heard of it! The British Finance Taskforce (a penny for those of us familiar with this) was established in 2010 to help find ways to help SMEs access finance, and in 2011 the appeals process was set up. In fairness, this does appear to be successful, with 40% of failed applications overturned. Many of these overturns happen when a business owner is able to explain an issue with their credit score and get this over turned by a human. Preparing for this, and having all the information you’ll need ready is something that I have written about here.

The key to this, as ever, is people being able to talk to fellow humans. An over reliance on computers, and therefore an increased perception (rightly or wrongly) of the “computer says no” attitude, can be one the main reasons why business owners are not asking for funding which may be available.

This is the main reason why Creative Capital have maintained a reliance on humans doing the underwriting, with no computer led decisions involved in our process. When we are looking at a company and its directors, we take the time to look at all the background we can, and will give business owners the chance to explain anything out of the ordinary to us before any decision is made. Crucially, we do not judge a company on its directors personal credit, but on the business. When we are looking at key debtors to lend against, of course we start off by looking at the credit score and history of that business. But we then look at company and group structures, directors reports, web sites and the press so we can build up as big a picture as we can. All this means we have been able to successfully lend to small businesses when others have not. Doing this quickly and efficiently, often within a matter of days of receiving the application is key, not only to us, but to our customers.

If you have experienced problems securing lending facilities form your bank, then try talking to a human, and find out how we can help your small business cash flow or go straight to our application form.

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