by Tom Caesar, Managing Director of Positive Lending Solutions
Unless you’re one of the lucky few who manage to obtain financial backing to start your new business venture, chances are you’re going to be borrowing money to get your ideas off the ground. Going into debt isn’t necessarily bad for businesses, in fact there are certain advantages to doing so, but the type of debt and your options for finance can be limited by your credit rating. Despite being upstanding citizens with a desire to start their own business and make a difference in the world, some people manage to develop a bad credit history. This could be for a number of reasons such as a poor instance of repaying a past loan, submitting multiple loan applications in a short period of time, or simply having a limited borrowing history.
Whatever the reason, for SME’s and startups, a lender is always going to look at the credit history of the business and the personal credit history of the owner(s). This will have an impact on the number of loan options you have, and the interest rate you’ll be offered. If you have a good credit score the number of lenders available to you will be high, and because they will all be competing for your business, the interest rates offered will be low. Conversely, if you have a poor credit score, the number of lenders available to you will be limited, and because you’re considered a risk, the interest rates will be higher.
What to do if you have a poor credit history.
You can’t run away from credit ratings because they follow you everywhere you go, so the best thing to do is accept the position you’re in and devise a strategy to improve it. After all, that’s what business owners and entrepreneurs do! The best way to improve your credit rating is to prove your ability to repay debt and show that what has happened in the past is exactly that, in the past.
One of the most common expenses for businesses in the startup phase are vehicles. They can be critical components for the early success of a business, and without one life will be incredibly difficult. If you need car finance for your business, and you have a bad credit history, you should consider applying for a bad debt car loan. You may have to accept that the interest rates will be higher, but a good quality bad debt car loan broker will find the best deal available to you given your current set of circumstances. And while you may have to pay a little extra in your monthly loan repayments, the benefits have the potential to far outweigh any negatives.
1. You’ll have a car for your business.
This is the reason you want the loan in the first place, right? If having a car gives you the best chance of being successful and turning your idea into a profitable business, then doing what it takes to get the car should be priority number one. That doesn’t mean you should accept any bad debt car loan, after all it has to be affordable and not put you under financial stress, but the car is the goal and that should stay front of mind.
2. It will improve your credit rating.
By making all of your repayments on time and in full throughout the life of the bad debt car loan, your credit rating will automatically improve. Also, just because you’ve signed an agreement doesn’t mean it isn’t negotiable at various stages throughout the life of the loan. If you’ve done a great job making repayments for 12 months, the lender may be receptive to a conversation about lowering the interest rate. After all, they want a happy customer so that you go back to them for future loans.
3. Better interest rates in the future.
Speaking of future loans, because you’ve now serviced a bad debt car loan, and in the process made significant improvements to your credit rating, you’re more likely to secure future loans at much better rates. Most businesses require loans throughout their history to grow and expand, so accepting and repaying a bad debt car loan with a slightly higher interest rate will hold you in good stead for the future.
How to maintain your good credit rating.
It’s human nature to get into debt and buy the things we want, and that has the potential to get us into trouble. When we use our hearts to overrule our heads, we can find ourselves in a financial situation that we start to lose control over. Being unable to make loan repayments has a detrimental affect on our credit score, the knock on effect being our ability to secure loans in the future is compromised. To ensure you don’t get yourself into a situation like this, there are certain strategies you can employ:
• Before accepting any loan offer, complete a spreadsheet on your income and expenses for the previous three months and find out how much disposable income you really have. If the loan will put you under financial stress, don’t accept it.
• Ask yourself “do I really need to be buying this”? Impulse and emotional buying has a habit of getting people into trouble, so before signing on the dotted line, take the time to think about whether you really need it or not.
• Whatever financial obligations you have, such as credit cards, loans, rental payments, etc., set up an automatic payment system. That way accidentally forgetting to make a repayment won’t affect your credit history, and you can concentrate your efforts elsewhere, such as growing your business!
• If you have multiple debts with varying interest rates, and you’re finding it hard to keep up, consider consolidating your debts into one. This may reduce the amount of interest you pay, and it’s easier to remember and service one debt rather than many.
• Whatever you do, don’t let your debts get so bad they end up with collectors. This does not look good on credit history reports. If you’re in trouble and finding it difficult to make repayments, bite the bullet and call the businesses you owe to arrange a repayment plan. Hiding and hoping it all goes away rarely works!
Be smart with your financial commitment choices.
Credit history reports are available online, most of the time for free, and will provide you with a clear picture of where you stand in the eyes of lenders. It’s a great idea to monitor your credit rating to ensure it accurately reflects your history, after all we’re human and mistakes can be made. By fully understanding your credit history, when it comes time to making decisions about whether to accept a loan or not, you are more likely to make a decision with your head and not your heart. You never know when you’ll need to secure an important loan for your future, such as starting your own business for example, and the last thing you want are past loans that you really didn’t need catching up with you at these vital moments in your life.
Tom Caesar is Managing Director of the Positive Lending Solutions, a group of financial services companies offering a broad range of finance to clients. With over 10 years’ experience in the industry, Tom’s drive to enhance the business through diversification has seen Positive Lending Solutions evolve to where it is today, a financial group highly focused on customer relationships. The group assists clients in the areas of vehicle finance, mortgages, insurance and wealth management.