What is a director credit check?

As a business owner, you’ll be aware of the fact that your company will have its own financial identity and a business credit file and credit score. So, when you are looking to be supplied goods on a credit basis, credit reporting agencies will take a look at you as the director, including any other directorships. 

This is where the director credit check comes in. Here, we’ll discuss what a director credit check is, why it needs to take place and how this can affect your business’s financial opportunities. 

What exactly is a director credit check?

A director credit check includes a background check on the directorships of all directors of a company. It is important to note that there is a difference between this type of search and a search on the business’s separate credit file. 

The point of a director credit check is to take a deep dive into the financial conduct of business directors to ensure due diligence and to identify any potential risk to the company. This way, financial entities looking to supply credit will have a detailed understanding of the level of risk they may be facing, if any at all. 

Who conducts director credit checks?

As mentioned above, director credit checks will most likely be conducted by various entities that are looking to lend credit to businesses or that are looking to enter into significant financial relations with a business, such as: 

• Lenders: Banks, commercial finance brokers, peer-to-peer lending platforms, and other credit providers.
• Suppliers: Especially when you're requesting significant credit terms, for example, net-30 accounts for materials or services. 
• Landlords: Commercial landlords want to ensure that their rent will be paid on time, as they will be depending on this income stream. 
• Insurers: Certain business insurance providers may conduct checks, particularly for larger policies.

Essentially, any entity that is looking to take a financial risk with a company will look to conduct a director credit check. 

At Creditserve, we specialise in taking a detailed look at directors and how the companies they are involved with are operating, therefore, giving us an understanding of the potential risk of dealing with a company operated by that director. 

What information is used in a director credit check?

The director credit check uses the same information that is found in a standard  credit check, for example: 

• Your payment history on personal credit cards, loans, and mortgages.
• Any bankruptcies, Individual Voluntary Arrangements (IVAs), or CCJs against you.
• Your electoral roll registration (a key identity verification point).
• Your current and past addresses.
• Your level of outstanding personal debt.

So, it is clear to see that, as a director, your directorships will be under scrutiny if you are looking to apply for credit or if you are looking to enter into a big financial agreement with another company.  

Why do they conduct director credit checks?

There are a few reasons why director credit checks are necessary, even for the director of a limited company that is considered a separate legal entity. For example: 

Personal guarantees (PGs) 

A lot of business finance products require directors to provide a personal guarantee, especially when it comes to SMEs. What this means is that if the business defaults, it is the personal responsibility of the director to ensure the debt is paid off. So, it is for this reason that lenders will need to assess the director’s personal ability to repay the loans. 

"Wash-through" effect

The financial world operates on trust, and if a director has a history of not being able to manage the company’s finances, it will raise a red flag. 

Fraud prevention & due diligence 

As mentioned above, director credit searches are a key part in being able to verify the identity of directors, as well as conducting due diligence. As a result of this, this combats fraud and ensures the legitimacy of applications. 

When do director credit checks happen?

There are a few situations where you most certainly will encounter a director credit search as a director, for example: 

• Applying for any type of business finance, which can include business loans, overdrafts, invoice finance, asset finance and lines of credit. 
• Setting up significant supplier accounts: If you’re requesting substantial credit terms from a new supplier, they will want to ensure that you are reliable. 
• Leasing commercial property: Commercial landlords will want to ensure that you can pay rent, and other directorships can help reassure them. 
• Applying for certain business services or insurance, especially those with a financial risk component, such as larger insurance policies.

The impact on company directors (and the business)

The results of a director credit check can affect you as a director. Let’s take a look at how: 

Less favourable terms and higher interest rates 

If your application for business credit has been approved, but there are a few concerns for lenders, you can expect to pay more on a monthly basis. Lenders tend to mitigate an increased risk by charging higher interest rates or offering less flexible terms. 

Impact on business reputation

Having continuous rejections from financial institutions as a result of a director credit check will negatively affect your ability to secure finances in the future or to build positive relationships with financial partners. 

Increased stress

This can also become an extremely stressful situation for you as the director, while also still trying to juggle the high demands of running your business. 

Essentially, as a business director, your financial conduct within a business will be heavily scrutinised when you are looking to take out credit for the business. Also, if you are involved in any other directorships, these will be taken into consideration before credit is agreed. 

So, it is important to proactively manage the director credit check process, as this will ensure you’re managing a key aspect of your business’s financial future. 

Start taking control of your business’s financial future today. If you’re looking for efficient credit check packages, Creditserve will help you run these on any company you may be looking to work with. With our services, you’ll be able to assess the risk efficiently, making informed decisions that allow you to mitigate financial risks. 

Contact us at 01992 414222 for more information!