Glossary

Adverse Credit History

Adverse Credit History

Adverse credit, otherwise known as poor credit history, can be a huge stumbling block to businesses seeking additional funding as part of their growth strategy. For businesses with adverse credit on their record, many loan options are off the table, which means finding the finance you need to move forward can be can an arduous process, or even an unachievable one in the short term.

Hope is not lost, however, as businesses with an adverse credit history can recover from it over time and often find alternative loan options based off the assets within their business rather than their credit profile. At Nucleus, we offer several secured funding options that are suitable for businesses who don’t have the credit history required to attain unsecured financing.

Regardless, poor credit history is never something you should want to your name nor be happy to have stick around, so it’s important to understand how adverse credit works, how it can affect you and, perhaps most importantly, how to recover from it if you ever do fall foul. Read on to find out more about adverse credit.

What is adverse credit history?

Adverse credit is more commonly know as poor or bad credit history. Your credit history is your personal or business’ financial record that lenders use as a basis to approve or deny you any form of credit you apply for. From a personal standpoint, a credit application could be anything from a mobile phone contract to a mortgage, while for a business it’s often a loan.

An adverse credit history is essentially a track record of poor repayment history on one or more accounts you have to your name, be it loans, utility bills or credit cards. If you have a history of making late repayments or failing to pay on one or more accounts, this will be noted on your credit report and negatively affect your credit score, which is the fundamental metric that lenders use to judge your financial credibility.

When you take out a form of credit, the lender will report back to credit referencing agencies and notify them as to whether you’ve made your repayments on time and in full. Pay off your debts in a timely manner according to your agreement, and you credit score will improve or, if it’s already good, remain high.

However, every time you are late on a payment or miss (default on) one, you will receive a “red tick” on your record. This will remain there for as long as six years, and in all likelihood lower your credit score.

In summary, adverse credit history tells a lender that you have struggled to manage credit in a healthy manner in the past, which can have serious and limiting financial implications for you and your business going forward.

What does adverse credit mean on my credit report?

If you have an adverse account on your report, that means you have an account to your name that details a poor payment history on your behalf. Any adverse accounts are flagged on your credit report, which will make lenders extremely wary of offering finance to you, if at all.

Some lenders may refuse to lend any money entirely, while others may approve funding, but with restrictive, unappealing conditions, such as higher interest rates alongside a reduced maximum loan amount. In simple terms, once you have adverse credit on your records, you become a significantly higher risk to lenders. From a lending perspective, that makes you either too high a risk to consider, or one to take on but with stringent conditions attached.

That translates to much more limited financial possibilities for your business, in terms of what financing you can apply for, the amount you can apply for and the amount you have to pay back. For example, most, if not all, unsecured business loans – which require no assets as a collateral – will be unavailable to you, as their basis of approval lies in you having a solid credit history.

What is considered adverse credit history?

What does adverse credit history mean for borrowers in the UK? Typically, it can refer to any of the following:

  • A track record of delinquent debt
  • Late payments on bills
  • Large amounts of money owed
  • Any evidence of bankruptcy or charge-offs (where an amount of debt is declared as unlikely to be collected)

In credit score terms, because there are multiple established credit referencing agencies used by lenders, all of whom use different scoring systems, there’s no absolute number that dictates a poor credit score. So, each referencing agency has its own limits in place that break up poor, average and good scores.

How do I know if I have adverse credit?

Individuals can check their credit score online via one or more of the established credit referencing agencies. The main three are Experian, Equifax, and TransUnion.

Each of these agencies offer paid and free services that allow you to check your credit report via that particular agency. You can find free access to your Experian credit report via MSE Credit Club, your Equifax report via ClearScore, and your TransUnion report via Credit Karma.

It’s advisable to check each of these accounts at least once a year and essential that you’re aware of where you stand before entering into any credit application. From a business perspective, each of the three agencies can offer commercial credit reports, too.

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    Is a default classed as adverse credit?

    If you default on an account, that means you’ve failed to honour the legal obligations of your credit agreement through failure to make a payment. Because late or non-payments are both considered behaviours worthy of adverse credit, any default you or your business makes on a payment will go against you on your credit report.

    What is adverse action – and does adverse action affect my credit score?

    In financial terms, an adverse reaction is the notice provided by a lender when a borrower’s credit application is denied. So, for example, if your business applies for a loan and your application is rejected, the lender is obligated to provide an adverse action notice to you that informs you of the reasons why your application was rejected.

    If you receive an adverse action, it will be logged on your credit report and could affect subsequent credit applications. It won’t do much damage to your credit score, but it could have a bearing in the decision-making process for a lender if they see you’ve been rejected for finance elsewhere.

    Adverse actions are typically borne out of adverse credit, meaning if you have a history of poor credit, including failure to make payments in full or on time or have a large number of hard checks on your record, you’re much more likely to be turned down on a credit application.

    What are my funding options with adverse credit?

    While unsecured business loans might be an unfeasible option for businesses with poor or limited credit history (brand new start-ups, for example, with no credit record behind them), there are still funding alternatives available.

    For instance, secured business loans, which use a business’ assets as collateral against the loan, significantly lower the risk for the lender. This means businesses with adverse credit can instead use their assets as the borrowing base for a loan, rather than their credit history.

    Asset based lending is one type of secured business loan that has become hugely popular in recent years for businesses of all shapes and sizes, and of all credit backgrounds. Asset based lending allows businesses to “unlock” cash tied up within their assets by putting them forward as security on the loan, which in turn allows for significantly increased credit amounts and greater flexibility than traditional, cash flow-focused loans.

    How to improve your credit score as a business

    Do you have any adverse credit? If you do, your priority should be to rectify your personal and company record as soon as possible. The good news is there are multiple ways to steadily improve your credit score and report, not least by taking on a secured loan and paying it off on time and in full. Taking on new credit and showing good financial behaviours with it is just one way to build yourself back up from adverse credit. Other common methods include:

    • Regularly checking and understanding your credit report, taking note of what needs to be improved and acting on it.
    • Making sure all current credit account bills are paid on time.
    • Establishing credit accounts with trusted suppliers who you use regularly. This increases the number of positive payments on your file. You can also look to share as much positive payment data from suppliers and vendors as possible, as often not all of it is reported.
    • Making sure any collection debts you do have are paid off and, just as important, ensuring that negative accounts are deleted from your file once paid up.
    • Challenging any errors and inquiries on your report to ensure your credit file is accurate and up to date.
    • Decreasing your credit utilisation ratio (the percentage of your available credit that you’re currently using) to under 15%. This can be done through paying off any significant outstanding balances, increasing your credit limit, decreasing your credit spending, opening up new lines of credit (with care), and paying your bills more regularly than required.

    Move forward from adverse credit history with Nucleus

    We are an alternative lender that works with SMEs of all backgrounds to provide fast, flexible, and manageable finance solutions. To find out more about accessing funding with an adverse credit history, request a call back from us or take a look at the range of funding services we provide.


    BY Jessica Lambert

    5 August, 2022

    4MIN

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