What is a limited credit file?

If your business is new and has only been operating for a short amount of time, it’s most likely that you have a limited credit file. You probably find that you’re applying for credit but are met with lukewarm responses or even rejection. This often-misunderstood term can feel like a financial roadblock, but understanding it is the first step to overcoming it.

Here, we’ll discuss what a limited credit file is and how it can affect your ability to secure credit. We’ll also offer practical advice, providing you with actionable steps on how to open a business credit file,  to help you build a stronger credit history for your business. 

The truth about limited credit files

Now, let’s get into the details of what a limited credit file is. Essentially, it is a comprehensive record of your financial history and your behaviour around borrowing finances. Credit files are compiled by credit reference agencies, and lenders use these credit files to assess your business’s creditworthiness. This shows them how reliable your business is in repaying loans. 

So, if your business has a limited credit file, it means that your financial history doesn’t have a lot of information attached to it. It’s important to note that having a limited credit file doesn’t mean that you have ‘bad credit’; it simply means that there isn’t enough information for lenders to assess your risk accurately enough. You might be financially responsible, but without a documented history, lenders are operating in the dark.

Different reasons for having limited credit files

Businesses having a limited credit file are more common than you might think and can be a result of various factors: 

• Your business is brand new: As a new business, your company hasn’t had enough time to build up a significant financial history of borrowing and repaying lenders. 
• Cash-based operations: If a business has been primarily operating on a cash basis or relying on its initial capital, it may not have engaged with traditional credit facilities, such as business loans or supplier credit terms. This means that there is no data to report back on. 
• Infrequent credit use: Businesses that have not used credit frequently or have used credit only once or twice will not have a substantial credit history. 
• Limited credit diversity: If businesses have only used one type of credit, their credit history won’t be very diverse. Lenders feel more comfortable lending to businesses with various credit products to be able to see the fuller picture. 

How a limited credit file affects your business

There are many ways a limited credit file will affect your business - let’s take a look at how. 

• Difficulty securing loans: Many businesses will need to access credit at some point, but having a limited credit file will make this difficult at first. 
• Higher interest rates: If you do get approved for a business loan with a limited credit file, you’ll most likely be offered less favourable terms, for example, higher interest rates. 

• Limited access to financial products: Businesses will have limited access to financial products with a short credit history. 

• Tougher supplier relationships: Most lenders will assess a business’s credit before offering favourable payment terms, and having a limited credit file will mean that businesses pay cash upfront. 

• Hindered growth: without being able to access credit, businesses may not be able to expand and grow as much as they need to. Also, managing unexpected cash flow gaps will be difficult to keep on top of without having access to credit. 
• Personal guarantees: When businesses have a limited credit file, lenders will often ask for personal guarantees from the directors, which will directly link the business’s debt to personal credit. 

How to open a business credit file to build a stronger credit history for your business

Fortunately, having a limited credit file does not need to be a permanent thing. Businesses can be proactive about building a robust credit history that opens doors for financial opportunity. The goal is to open a business credit file that is full of positive data. Here are a few practical steps your business can take to build a stronger credit history. 

• Separate finances: When you open a business credit file, it’s best to have a separate business bank account, as this clearly separates the business finances from any personal accounts.
• Register details accurately: Businesses should ensure that all business details are correct and up-to-date with all credit referencing agencies. 
• Establish trade credit: Businesses should strategically seek out suppliers who report payment history to business credit agencies. Also, businesses should ensure that all invoices are paid on time. 

• Consider a small business credit card: When used responsibly, having a business credit card can be a great way to start up your business credit history. This should be used only for manageable expenses, and the full balance should be paid every month.

• Small loans: Equally, businesses should explore small loans that are easy enough to pay off. This is specifically useful to pay for a small project or piece of equipment.

• Timely account filings: Businesses should ensure that all annual accounts are filed promptly and accurately with Companies House, and this can also provide more data for lenders to assess.
• Monitor business credit score: Businesses should always keep on top of their business credit score and should regularly check their business credit report from credit referencing agencies. This will help businesses track their progress and spot any inaccuracies in the report.

Improving your financial opportunities

It’s crucial to be able to build credit as a business because this is part of a larger picture of establishing financial well-being. There are a few things you can do to improve your financial opportunities as a business. 

Firstly, you need to improve your financial literacy as a business by understanding how credit scores are calculated, the impact of different credit products and the importance of responsible borrowing. 

As part of your effort to improve your financial opportunities, you also need to master budgeting as a business. Having a solid budget ensures that you will meet all your financial obligations, including credit payments, and that you don’t miss payments that can harm your credit file. 

Lastly, it’s important to realise that building a strong credit file takes time and consistency in responsible financial behaviour. 

Empowering your business’s financial future

It’s normal for a new business to have a limited credit file when starting its financial journey. With a strategic plan, your business will be able to build a healthy credit score, which will open doors to better financial products, more favourable interest rates and greater financial freedom. 

Start taking control of your 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!