A Better Way to Get Business Credit in 2020

Chapter 1

What is business credit?

In layman’s terms, business credit refers to both the overall state of a company’s financial health and a specific genre of financial loan.

Much like a personal credit score, this snapshot of a business’s financial profile is built up based on a huge number of factors including payment behaviour, overall asset value and agreed future income.

Business credit loan applications are approved or denied based on this financial health, just like personal loan or mortgage applications. They take many forms, but each allows businesses to make essential purchases and undertake new projects when they don’t have the required capital to hand. 

Traditionally, the larger high street banking names have had a virtual monopoly on the business credit and business credit borrowing landscape. The consequences of this monopoly have been that there has been little pressure on these large lenders to streamline their process. As a result, thousands of applicants over the years have been dragged through seemingly endless credit checks, only to then wait weeks, even months to access vital funds.

The recent emergence of challengers to this way of doing things should therefore come as little surprise. We stand at the vanguard of a very exciting new age for business credit access, which could potentially supercharge SMB activities across the UK.

This guide will outline the state of play in the business credit world in 2020 and provide an insight into the best way forward for growing companies looking to push their financial operations forward.

Business lines of credit

A line of business credit allows companies to borrow money without the need for a formalised business loan, and works in much the same way as a personal credit card or overdraft. Companies who have borrowed money via business credit also only pay interest on their outstanding balance, meaning that the more they pay back, the less interest they will accrue.

Thousands of UK companies favour business credit over other borrowing options, like business loans or friends and family loans, as it allows a greater degree of flexibility. Pre-agreed business credit facilities also needn’t be used immediately upon approval.

It can function as a means of paying for essential purchases quickly while cashflow is held up or when payments are waiting to clear. Companies also sometimes utilise business credit as a ‘rainy day’ resource that acts as a safety net when payment or invoicing is delayed.

This latter approach only applies, however, when the agreed credit resource doesn’t come with pre-defined ‘draw periods’ and ‘repayment periods’, which some lenders implement into agreements as a means of ensuring prompt repayment.

But without these parameters in place, once a business has successfully applied for a line of business credit they are free to access and spend as much money as their credit limit allows. The business in question will have access to this credit limit, unless they agree to increase or reduce it with their lender, throughout the lifetime of their account.

The established business credit sources

Banks and building societies

As recently as 20 years ago, banks were basically the only accessible source of business credit in the UK. Applications typically involved thorough credit checks, referencing and a rigorous approval process that would often hold up the process to the point of obstruction.

In many cases, companies applying for business credit are generally borrowing for a reason. They would either need to receive money in advance of payment to fulfill orders or to pay for the day-to-day expenses of running a business, like transport or equipment. In either of these use cases, a slow application turnaround can lead to missed deadlines, a lost contract and significantly reduced long-term income.

To this day, each of the so-called ‘Big Nine’ banks offer business credit loan facilities, with many having taken steps to make their processes smoother and faster. However, a larger financial institution is still very likely to be extremely risk averse, making extended business credit checks highly likely with these providers.

Peer-to-peer lenders

While not centuries old like many of the Big Nine banks or building societies, peer-to-peer (P2P) lending has established a strong foothold in the business credit landscape. 

Platforms like Funding Circle allow companies to borrow money from registered individuals or other organisations, who make a profit on the borrowing via the interest accrued across the lifetime of the loan. The result of this is that, to allow lenders to make a profit, there is a minimum unsecured loan amount of £10,000 and a maximum of £500,000.

The new breed of business credit challengers

Alongside the newer names in the traditional business credit sphere sit a number of challengers offering cutting-edge solutions to long standing problems. Here is just a snapshot of the innovators changing the world of business credit in 2020:

Esme Loans

A number of quick turnaround business credit loan providers have emerged over the last few years as a reaction against the perceived slowness and inefficiency of the traditional paths to borrowing. 

Chief among them is Esme Loans, who were established in 2016 with the backing of NatWest with a remit to make business credit loans more accessible and, crucially, faster.

Esme allows businesses to borrow between £10,000 and £250,000, via an online application process that takes less than ten minutes with virtually instant approval or rejection. This allows businesses to access much higher levels of credit than a traditional NatWest Small Business Loan, which has an upper limit of £50,000 (although both Lloyds Bank and Funding Circle offer credit of up to £500,000).

Successful Esme credit loan applicants receive access to their funds usually within an hour, dramatically slashing the turnaround time offered by the more established routes to credit. Esme outlines a representative fixed APR of 8.73%, although this can vary depending on business circumstances.

NatWest Rapid Cash

One of the latest ventures from one of the Big Nine banks, Rapid Cash is is the more modern wing to the NatWest business lending offering. While the banking group still offers all of the traditional means of accruing business credit and securing business loans, Rapid Cash tackles the age-old issue of delayed cash flow.

Rapid Cash allows businesses to borrow money against their unpaid invoices. In other words, if an applicant can prove that they are owed payment by a client or customer, but the funds haven’t been cleared yet, they could be eligible for Rapid Cash business credit (checks permitting).

Should an application be approved, the business will be able to access the funds in 48 hours, a much quicker turnaround than the vast majority of traditional business loans. This can help thousands of businesses up and down the UK to keep their essential purchases moving, without having to remain at the behest of the payment approval process. 

Rapid Cash also offers ongoing lines of business credit for businesses with consistent payment delays. This access to funds can be the difference between growing a business and consistently being left frustrated waiting for promised payment to hit an account.

Soldo

Brand partnerships are a huge emerging player in the business credit world.

Thanks to partnerships such as Soldo’s with both Rapid Cash and Esme Loans, prepaid card account holders can apply for and access lines of business credit on their business expense cards.

The impact of this is two-fold. First of all, staff needn’t carry two physical cards, while finance teams and accountants have fewer bank feeds and spending details to track. Across a year, particularly across a large organisation with multiple teams and departments, this can represent a major efficiency gain.

But also, the issue with traditional prepaid cards is that, by their very nature, if the funds aren’t loaded onto the card to spend, then the purchase can’t be made. The knock-on effects are that either an essential purchase gets delayed or the staff member at point-of-sale has to pay out of their own pocket.

This, in turn, can have a serious impact on team morale if staff are consistently expected to pay for goods and services, then wait for reimbursement.

What these partnerships allow is an all-in-one solution to day-to-day spend. Yes, the account admin or manager can still set staff spending budgets and bespoke rules. However, should a team member be required to make an unexpected purchase, they needn’t wait for their finance manager to reload funds onto their cards. They could simply pay using their line of credit, which their manager can then reimburse their card for retroactively.

The result is a smoother business expense process which puts control back in the hands of the account holders and protects managers against potential staff disgruntlement.

Chapter 2

Business credit and small/medium businesses

Why might SMBs need business credit?

According to figures released in 2018 by energy provider Utilita, six in ten small businesses in the UK are struggling to access goods and services due to poor business credit. In other words, thousands, possibly millions of companies aren’t maximising their productivity and profitability because they haven’t built up or protected their credit score.

This is a serious issue for a number of reasons, outside of the obvious impact on earning and growth.

Many early stage businesses, be they true startups, sole traders or simply entrepreneurs starting out on their own, don’t begin their business life with a pot of funding to get started with. Others simply don’t have a ready-made customer base to tap into on Day One and start generating business revenue. 

Furthermore, those who do have early stage clients or customers, depending on their industry, may have to wait weeks or even months before payment actually lands in their account.

According to Statistica figures from 2016, UK businesses with an annual turnover of less than £1 million have an average waiting time of 71 days between issuing invoice and receiving payment. It is in these moments that many SMBs turn to business credit-based borrowing to finance the day-to-day running costs of their company.

By extension, poor business credit can hinder an early stage business from accessing the necessary funds to facilitate even the most basic business tasks. These include:

Early stage payroll

Tax and expenses on essential purchases

Unexpected expenses such as travel, repairs or maintenance

Chapter 3

How does a business get approved for credit?

As mentioned, ‘Business Credit’ can refer to both a type of loan (i.e. one borrowed against your credit profile) and your level general of ‘lendability’. The better your business credit profile in the eyes of financial institutions, the more likely you are to be approved for a business credit loan.

‘Good’ and ‘Bad’ credit

‘Good’ business credit can be a gateway to a wide range of borrowing options that can help companies progress and take their offering to the next level. Alternatively, they can just keep day-to-day operations ticking over as normal at times when payment isn’t as forthcoming as it should be.

‘Bad’ credit, on the other hand, exactly the same as bad personal credit, can roadblock loans or credit card acceptance and make life significantly harder. Indeed, a poor credit history can make it nigh-on impossible for company directors or founders to engage in any non-cash transactions (e.g. taking out a business mortgage or running pre-invoice payroll).

Overall, it can act as a serious barrier to business growth unless steps are taken to address it.

How does personal credit affect business credit?

This is one of the most commonly asked questions in the business credit process.

The honest answer is that it entirely depends on the business circumstances and how dependent a company is on its founders or directors for investment or funding.

The differences between business credit and personal credit are:

Business credit maps out the financial reliability of a company. Assessors look into how the business operates and how it has behaved during its financial operations. Simple acts like paying business expenses quickly, paying staff on time or paying off a business credit card all help paint a favourable picture of how reliable a business is in the eyes of money lenders.

For established businesses, personal credit (good or bad) rarely impacts business credit or influences the decision of a provider to approve any kind of credit lending.

However, for early stage companies with little financial history to draw from, meaning that many potential lenders will look into the personal credit history of founders or other senior team members to make a judgement.

This is particularly relevant for sole traders, for whom personal and business credit are inextricably linked in the eyes of banks and lenders. 

Growing businesses can eventually separate their personal and business credit profiles once they have built up enough good credit through the business (paying suppliers on time, repaying company credit cards etc.).

Building ‘Good’ credit

There are a number of clear, actionable solutions that any business owner or finance manager can take to improve and build their business credit score. They range from the extremely practical to the relatively obvious, but it pays for any business to understand and appreciate just what affects business credit and what doesn’t.

Pay bills on time

This isn’t simply good advice for maintaining a realistic view of a business’s overall finances, it actually provides tangible benefit to a business credit score. Just like in personal finances, if your business keeps outstanding charges to a minimum, it shows up in credit checks as a sign that anything borrowed will be repaid promptly.

Keep track of business credit score online

Business credit scores aren’t an exact science or even universally known among SMBs. According to figures released in 2018 by Nav, 45% of small business owners didn’t know they had a business credit score, while 72% aren’t sure where to find information on their score. 

There are a number of online tools that can give a business a snapshot of how lenders will view a business. Chief among them are the aforementioned Nav and the best known credit score service, Experian, both of which analyse your business finance activity before providing an indicative score out of 100.

The higher a score, generally the more likely a company is to be accepted for business credit if and when they decide to apply for a business credit loan or a line of credit.

Register with a business credit reference agency or directory

Much the same as tracking a business credit score manually online, many companies pay an external agency to provide an accurate view of their credit profile. While this takes much of the work out of it, the process can be costly, particularly for early stage businesses.

Service providers in this area include Graydon and CreditServe.

Check your suppliers’ credit

Many of the credit check vendors, Experian included, also offer their customers the chance to run credit checks on suppliers and customers before entering business agreements with them. 

While some may view this a slightly intrusive, it can also be a very effective way of sidestepping companies who may not be willing or able to pay their invoices on time. The knock-on effect of an unpaid invoice can be dire, leading to unpaid bills or missed payment deadlines. These can be extremely harmful to a business credit score, so it’s important to know who you’re dealing with.

Avoid county court judgements

Again, this may seem like an obvious one, but however small or seemingly harmless the county court judgement (CCJ), it can have a tangible impact on a business credit score. Payment disputes, unpaid charges, even company parking fines can show up as red flags to credit providers during the application process. It pays to keep the company’s nose clean.

Types of business credit loan

With a solid credit score, a clear plan of action and the demonstrable means to pay back what they borrow, a business looking to secure a business credit loan has a number of options. Under the umbrella of ‘business credit’ sit a number of loan structures that both traditional and new generation credit providers offer. 

Business credit loans include:

Short term loans

These are quick injections of cash which hit a business’s bank account relatively swiftly and generally have a repayment period of less than two years.

Longer-length loans

In the main, these are defined as higher value loans which are repaid over a period of between three and 20 years.

Variable loans

‘Variable’ refers to the level of repayment or interest accrued throughout the lifetime of the loan. In other words, repayment amounts and interest increases can fluctuate depending on market rates.

Fixed-rate loans

In contrast to variable loans, fixed rate loans remain consistent up to the point of full repayment. Monthly payments stay the same and interest remains at a pre-agreed level.

Working capital loans

These are dedicated loans that help a to operate when they don’t have ready access to required funds themselves. For example, imagine a bakery receives a massive order for 10,000 loaves of bread, with payment promised on delivery. If the baker doesn’t have the capital required to pay for the necessary ingredients or staff up front, but future payment is agreed, a working capital loan could be used to bridge the gap. 

Commercial mortgages

These work much the same as private or personal mortgages, where a business borrows money against the value of property owned in its name, such as offices or workshops.

Equity finance

This is a funding strategy often utilised by early-stage startups, who sell off equity (ownership stakes) in their business in exchange for capital. Some business credit providers will allow companies to borrow against the value of their own equity.

Asset financing

This route to capital borrows against the physical assets of a business, for example equipment, tools or vehicles. These, along with commercial mortgages are often ‘Secured’ loans, meaning failure to repay can result in the provider repossessing the items in question.

Invoice financing

As mentioned in a previous section, invoice financing allows SMBs to borrow against the value of confirmed or agreed work. If they can provide sufficient proof that payment will be received at a later date, they can apply for a business credit line to match the value of the agreed work. This can make actually delivering the work significantly easier in the short term.

Chapter 4

Business credit in 2020 – a brave new world

The world of business credit will soon be unrecognisable compared to what it was at the turn of the millennium. Where there was once little choice other than to visit the local bank manager and wait an eternity for approval, now there are myriad options to fit the unique requirements of any small and growing business across the UK.

Providers are fresher and more dynamic, while access to funds is quicker and more straightforward. We sit at an incredibly exciting time for business growth and innovation.

However, in spite of this systemic change, access to business credit still hinges on a company’s ability to demonstrate responsible, dependable financial behaviour.

It may sound like an obvious point to end on, but it remains as important now as it ever has been.

Pay the bills on time, repay the business credit cards and track the company credit score. That way access to the cash the business needs to grow can take minutes, rather than weeks. In the long run, this could make all the difference.