Get your Credit Rating in Check

Ensure your credit rating is in good shape before approaching a lender for funding, Suki Dehal, franchise development manager at Lloyds Banking Group, says

Budding entrepreneurs are increasingly becoming more aware of the advantages of looking at franchising as an option for entering into self-employment, with the added confidence of training and support offered by an experienced franchisor.

However, one of the barriers of entering franchising we hear more frequently is that prospective franchisees are unable to acquire the necessary funding following a history of poor or no credit. Therefore, it’s important to ensure you take steps to improve your credit rating to maximise your chances of obtaining finance when needed to realise your ambitions.

Credit scoring

The first step is to be aware of your rating and what factors impact it. Credit scoring is an increasingly important part of everyone’s financial lives, not just affecting the obvious, such as credit cards, mortgages and loans, but also your ability to get monthly car insurance, contract mobile phones or switch your energy supply from prepaid key meters to monthly direct debits.

You can view your credit file using a variety of online services, including Experian and Equifax, usually on a free trial basis for 30 days. By doing so, you will be able to identify what impacts your score and even rectify any errors listed against you, which can happen more often than you may believe.

There are numerous factors that can cause your credit rating to fall.

Some of the most common are:

• Significant levels of outstanding debt.
• Numerous credit applications within the last six months.
• Arrears on existing debt, leading to defaults.
• Late payments.
• Unsatisfied county court judgments. Being unregistered on electoral roll. Frequent changes of address.

Improving your rating

The first course of action would be to avoid any of the above. Nevertheless, if you’ve already damaged your credit rating, there are various ways of improving it.

It’s essential to ensure you improve your rating prior to applying for further credit, as applying and being declined will set your rating back further. If any debts have escalated to CCJ level, they will remain on your file for a period of six years, preventing access to further funding while they remain outstanding.

Ensure these outstanding debts have been settled in full before applying for further borrowing to increase your probability of success in the future.

Common methods

Other common methods of improving your credit rating include:

Building up a good track record with any credit facilities you have in place by meeting payments on time or by clearing any defaults.

Ensuring any incorrect entries are rectified on your file. To do this, firstly complain to the lender and ask it to delete it.

If that fails, write to the credit reference agency, requesting it to add a concise and factual notice of correction to your credit file.

Finally, if necessary, make a complaint via www.financialombudsman. org.uk, which can adjudicate if the default is unfair and get it removed.

Get added to the electoral roll at your current address if you’ve not done so already. Visit www.gov.uk for more information on how to do this.

Put direct debits in place to ensure minimum payments are met on time.

Specialist credit card facilities can be acquired even with poor credit history to begin repairing any historical issues.

These cards will usually carry significantly higher interest rates than regular cards, which is why it’s best to set up direct debits to clear the total balance on a monthly basis to prevent any interest costs.

If you have existing credit cards, you can use these instead of applying for new cards.

Cancel any unused or dormant credit facilities you may have. Too much available credit, even if unused, can be a problem, so it’s best to cancel some.

Significant levels of outstanding debt can adversely affect your credit rating However, this must be balanced against the fact one or two longstanding accounts with good credit histories will benefit your credit score with some lenders.

Don’t let your partner’s score negatively affect your own. ‘Linkage’ means their credit history can be looked at when you’re scored, so avoid it if one of you has a poor history.

Equally, if you separate from someone you were joined to, write to the credit reference agencies and ask for a ‘notice of disassociation’.

Probability of success

By following these steps you can improve your personal credit record and maximise the probability of success for any future lending applications.

You should start addressing historical issues straight away, so that you will be in a position to apply for financial assistance from a bank when you find the right franchise opportunity.

Franchising can be an excellent option in helping you run your own business. However, ensure your credit file is in optimum health before approaching a lender to support your financial plans.

Essential route

Lenders with a specialised franchise department, such as Lloyds Bank, are the essential route for funding the franchise opportunity you’re considering.

They will have a team of trained managers, who understand franchising and are likely to have a track record of funding existing franchisees in the brand you’re looking to invest in.

To apply for finance to assist with your franchise investment plans, a bank will require a detailed business plan, incorporating financial projections and a breakdown of your personal assets, liabilities, income and expenditure position.

Most franchisors will offer assistance with your business planning. Banks also have business plan templates that can assist you.

It’s essential you’re well prepared before approaching a bank for funding.

Practice the delivery of your plan before meeting a bank manager. Expect to be challenged - you should be able to confidently answer questions about your plans for the success of your business.