No credit vs bad credit: What’s better for your business

For a business, credit extends beyond simply borrowing money from banks and lenders. It also involves accessing goods and services from vendors on trade credit, with the promise of payment at a later date, often aligned with your cash conversion cycle. This arrangement reflects the trust your business partners place in you, demonstrating the strength of your relationships. To some extent, business credit scores quantify this trust.

While a good credit score is clearly advantageous, what happens when there is no credit history at all? And how does this compare to having a bad score? Without fuel, there can be no fire, but is it truly that straightforward? Every scenario has its pros and cons, and this blog post will explore the answer to the question 'Is no credit better than bad credit?' from a business perspective, covering:

• Understanding credit histories
• Implications of having no credit history
• Ways to overcome no credit history
• Implications of having bad credit history
• Ways to overcome bad credit history
• Is no credit better than bad credit for your business?

Understanding credit histories

What is a credit history? Simply put, for a business, it is a detailed report documenting how the organisation has performed in repaying outstanding payments and managing historical debt. It includes information of all credit accounts, detailing their types, duration, amount owed, credit used, payment timings, and even the number of credit inquiries. This information is documented in a credit report, which includes details on bankruptcies, liens, and relevant legal records.

Based on the financial information in this report, Credit Reference Agencies (CRAs) generate a credit score. Both the credit history and score indicate how responsibly the business has managed its debts and finances. They also reflect the current financial situation and can influence future financial opportunities.

What is a good credit history?

Credit history is considered good for an organisation when it has low debt levels and is diligent in fulfilling its financial obligations such as paying bills and dues. It is often indicated with a good credit score. This condition generally suggests a clean record with negligible negative entries, such as legal disputes or bankruptcies. Other positive contributing factors include low credit usage, few inquiries, and a long financial history.

What is a bad credit history?

A bad credit history is often indicated by a low credit score and is characterised by late or irregular payment records and substantial outstanding debt. Elements such as late payments, high levels of credit utilisation, a short financial history, and instances of defaults, bankruptcies, foreclosures, or legal conflicts contribute to a bad credit history.

Implications of having no credit history

No credit history doesn't equate to having a score of zero; instead, it signifies that the history is absent altogether. This means there's not enough information for CRAs to evaluate a score. Having no credit history presents a few drawbacks, such as:

• Difficulty in acquiring funds

When making decisions, investors, lenders, and creditors typically look at a business's financial history and scores first. These figures highlight the lending risk associated with an organisation and are crucial in their evaluations. A missing financial history complicates risk assessment, consequently affecting the willingness to finance. It also makes it harder for a business to showcase its creditworthiness and secure the needed funding.

• Higher interest rates or security deposits

Even if some creditors and investors are willing to lend money in the absence of financial records, it often comes with higher interest rates and may require security deposits or collateral. Additionally, the terms are likely to be less favourable.

• Difficulty in acquiring trade credit

Credit history is essential for securing trade credit, as vendors and suppliers rely on it to assess the business' reliability. Without it, they may be hesitant to offer favourable terms or extend payment periods. This can lead to requirements for personal guarantees, upfront payments, and stricter conditions, potentially affecting your cash flow.

• Limited financial flexibility

The difficulty in accessing funds can hinder a business's ability to grow, seize new opportunities, or manage its cash flow efficiently. This challenge is especially troubling during unforeseen expenses or emergencies. Shortage of funds can make it difficult to cover new expenses without affecting day-to-day operations.

Despite these challenges, there is also a potential advantage to having no credit history.

• Better growth opportunity

One of the key advantages of having no credit history is that there are no records of past liabilities or negative marks. This clean slate gives a business the opportunity to build a strong financial track record if it manages its finances well moving forward.

Ways to overcome no credit history

To overcome the limitations of having no credit history, the best approach is to start building a positive one. The absence of negative records gives organisations an advantage, making it easier and faster to establish a strong credit profile compared to those with a negative history. Here are some tips to help expedite the process.

1. Apply for a business credit card

Consider applying for a business credit card if you haven't already. It's a smart step towards establishing a credit score. Be sure to use it wisely by making small, consistent purchases and paying them off promptly.

2. Take a small business loan

If required, look into taking out a small business loan from a local bank or credit union. Timely loan repayments can demonstrate financial diligence and aid in building your credit score. Be mindful of making several loan requests, since this can lower your score. Each application often leads to a hard credit check, and frequent checks can impact your score negatively.

3. Establish trade credit

Begin by building strong relationships with your vendors and suppliers; negotiate trade credit, which enables deferred payments for goods and services. The initial terms might not be ideal, but by consistently paying on time and managing your accounts well, you can enhance your reputation. Over time, this can establish your creditworthiness and eventually lead to improved terms.

4. Ensure your payment activities are reported

For your credit score to be generated, it's important that your payment activities are submitted to CRAs. The best way to achieve this is by working with creditors, vendors, suppliers, and business partners that are known for reporting these details to CRAs.

5. Regularly monitor your credit reports and profile

Frequent checks on your credit reports help ensure that your information remains accurate and updated, allowing you to catch and fix any potential problems quickly.

Implications of having bad credit history

Clearly, the implications for a business will be serious, with potential consequences including:

• Rejection of loans and funding

A poor credit score signifies greater risk and reduced creditworthiness, leading lenders and creditors to potentially refuse loans or credit lines. Investors consider a poor financial history a red flag, making it harder to secure investment. This difficulty in obtaining funds hinders business growth, expansion, and the ability to pursue new initiatives.

• Higher interest rates

Although funding might be attainable, it usually comes with increased interest rates and more stringent loan conditions. These may involve shorter repayment timelines, greater collateral demands, or more frequent payment schedules, all of which elevate the total borrowing cost and can adversely affect profitability.

• Reduction in trade credit

A poor credit score may lead suppliers to limit or withdraw trade credit, impose stricter contract terms, or require upfront payments. Since trade credit is crucial for managing cash flow, such changes can disrupt cash flow and operational flexibility, and potentially strain long-standing supplier relationships.

• Higher insurance premiums

In some cases, insurers use financial information to determine premiums. A poor credit record can lead to higher insurance costs for the business.

• Damaged reputation

Having a poor credit record suggests financial mismanagement, which can significantly hurt the business's reputation and strain its relationships with customers, suppliers, and potential partners.

Ways to overcome bad credit history

Improving a bad credit history, characterised by negative records, is a challenging but achievable goal. While it may not be easy to quickly transform a poor score into a good one, consistent efforts and best practices can make a significant difference. Here are some strategies to help improve your credit history:

1. Make timely payments

Be consistent in paying bills and dues on time. Setting up reminders or automatic payments can help you maintain a strong track record of timely payments.

2. Reduce debt

Employ effective debt management practices to minimise debt levels and regain financial stability.

3. Address the underlying issues

A poor credit score often stems from specific financial practices and decisions, which can vary between organisations. It's crucial to analyse and identify the root causes of negative records, such as late payments, defaults, or excessive debt. Once these issues are determined, create a targeted plan to address them and prevent recurrence.

4. Improve your financial management

A bad credit history indicates financial mismanagement. To remedy this, it's important to refine your current financial strategies and policies. This could include actions such as enhancing your budget control process, lowering your credit utilisation ratio, and steering clear of new credit inquiries. Moreover, harnessing technology through financial management software or forecasting tools can help streamline processes and support data-driven decision-making.

5. Regularly monitor your credit report

Your credit report could contain mistakes or inaccuracies, making regular checks essential. If you find any errors, you can contest them with the CRAs to maintain the accuracy of your report.

6. Consult professionals

Consult a credit counselling service, financial advisor or a credit repair service who can best analyse your situation and help you identify negative items on your report and offer advice and strategies to improve your financial records.

Is no credit better than bad credit for your business?

Aspect	No Credit History	Bad Credit History
Credit score	Non-existent	Low
Building good credit score	Fairly easy	Difficult
Time taken to build good score	Often less, sometimes just a few months	Longer, often several years
Acquiring funds and new loans	Comparatively easy	Very difficult, may be denied
Interest rates	May be high	Likely to be high
Security deposits & guarantees	May be required	Likely to be required
Acquiring trade credit	May be difficult	Will be difficult, often comes with stricter terms
Financial flexibility	Limited, depends on financial standing	Highly restricted, especially if in heavy debt
Opportunity to grow	Higher, with careful financial management	Limited, hampered by existing financial liabilities
Reputational damage	None	High, can affect partnerships and contracts

The table above provides a concise comparison between the two situations, clearly indicating that having no credit history is preferable to having a bad one. However, it's important to recognise that neither scenario is ideal in the long term, especially if growth and prosperity are your goals. While a business with no credit history may play it safe, this approach can prove harmful by eventually hindering growth and limiting opportunities and access to resources. Whether you're dealing with no credit history or a bad credit history, efficient financial management is essential for overcoming these challenges.

At OneAdvanced, we are dedicated to supporting and simplifying your financial management journey. Our cloud-based financial management solution, Financials, efficiently handles all aspects of financial accounting on a single platform. It facilitates finance functions such as accounts payable, accounts receivable, credit management, bank reconciliation, asset management, and purchasing management.

Equipped with robust reporting tools, Financials provides real-time access to key financial information. By enabling a real-time view of liabilities and automating accounts payable processes, Financials helps ensure you maintain exemplary financial practices.

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