Why Lenders Run Credit Checks
Lenders use credit checks to assess risk. They want to understand how you and your business have handled financial commitments in the past, because this gives them an indication of how you are likely to behave in the future.
A credit check is not a pass or fail test. It is one piece of information that lenders consider alongside other factors such as trading history, revenue, cash flow, and the purpose of the funding.
That said, credit history does matter. Serious issues can limit your options or affect the terms you are offered. Understanding what lenders see helps you know where you stand.
What Do Lenders Actually Check?
Business credit history
If your business is a limited company, it will have its own credit file. This includes information about how the company has managed credit in the past, any county court judgments (CCJs) registered against it, and its overall credit score.
Not all businesses have extensive credit histories, particularly newer companies. In those cases, lenders place more weight on other factors.
Director personal credit
For smaller businesses , lenders often review the personal credit files of directors and sometimes shareholders or PSCs. This is because the finances of small companies are often closely linked to the individuals who run them.
Your personal credit history includes information about how you have managed personal credit accounts, any missed payments, defaults, CCJs, and your overall credit score.
Payment history
Lenders look at how consistently you have met payment obligations, both for the business and personally. A track record of paying on time is reassuring. Late payments, defaults, or missed payments raise significant concerns.
Existing credit commitments
Lenders want to understand what other borrowing you already have. This helps them assess whether additional finance is realistic and affordable given your current obligations.
CCJs and legal issues
County court judgments are taken seriously. A CCJ means a court has ruled that you or your business owed money and failed to pay. Lenders view this as a sign of financial difficulty or poor management of obligations.
How Credit Issues Affect Your Options
Minor issues and occasional late payments
Minor blemishes on an otherwise healthy credit file are unlikely to prevent you from accessing finance. Most lenders understand that things occasionally go wrong. What matters is the overall pattern.
Satisfied CCJs
A CCJ that has been paid off (satisfied) is viewed more favourably than one that remains outstanding. Many lenders will consider applications from businesses or directors with satisfied CCJs, though the terms offered may be less favourable than for someone with a clean file.
The age of the CCJ matters too. A satisfied CCJ from several years ago carries less weight than a recent one.
Outstanding CCJs
An outstanding CCJ is a more serious concern. It suggests an unresolved debt and raises questions about your ability or willingness to meet financial obligations. Options are limited in this situation, though some specialist lenders may still consider applications depending on the circumstances.
If you have an outstanding CCJ, it is worth considering whether you can satisfy it before applying for finance. This may improve your options.
Defaults
A default means a creditor has recorded that you failed to meet the terms of a credit agreement. Like CCJs, defaults remain on your credit file for six years. Recent defaults are viewed more seriously than older ones, and multiple defaults are more concerning than a single incident.
IVAs and bankruptcy
An active Individual Voluntary Arrangement (IVA) or bankruptcy proceedings will typically prevent access to most business finance. Lenders generally will not offer funding while these are in place.
After discharge, options may begin to open up, but it takes time to rebuild your credit profile. Some specialist lenders may consider applications from discharged bankrupts, but terms will reflect the higher risk.
Soft Searches vs Hard Searches
Hard searches
A hard search, also called a full credit check, is recorded on your credit file and visible to other lenders. Each hard search leaves a footprint. Multiple hard searches in a short period can make you look desperate for credit, which may reduce your chances of approval elsewhere.
Hard searches typically happen when you submit a formal application for finance.
Soft searches
A soft search, sometimes called a quotation search, is not visible to other lenders. It allows a lender or broker to check basic credit information without leaving a mark on your file.
Soft searches are often used for eligibility checks, allowing you to understand your likely options without any impact on your credit score.
If you are exploring funding options, checking eligibility through a soft search first is a sensible approach. It protects your credit file while giving you useful information.
How to Check Your Own Credit
Before applying for business finance, it is worth checking your own credit files so you know what lenders will see.
For personal credit, you can use free services such as ClearScore, Credit Karma, or Experian. These show your credit score and the information held on your file.
For business credit, you can check your company's file through agencies such as Experian Business, Creditsafe, or Dun & Bradstreet. Some services are free, others charge a fee.
Checking your own credit does not affect your score. It is a soft search.
When reviewing your files, look for:
- •Errors or outdated information that should be corrected
- •Any CCJs, defaults, or missed payments you were not aware of
- •Your current credit score and how it compares to typical lender requirements
If you find errors, you can dispute them with the credit reference agency. Getting incorrect information removed can improve your position.
Improving Your Credit Profile
If your credit history is not where you would like it to be, there are steps you can take to improve it over time.
- •Pay bills and existing credit on time: Payment history is one of the most important factors in your credit score
- •Reduce outstanding debt where possible: High levels of existing debt can affect your score and your affordability assessment
- •Check for errors and get them corrected: Mistakes on credit files are more common than you might think
- •Register your business with credit reference agencies: Ensuring information is up to date can help build a profile
- •Avoid multiple applications in a short period: Each hard search leaves a footprint
- •Give it time: The impact of negative information reduces over time with good financial management
What If Your Credit Is Not Perfect?
A less-than-perfect credit history does not necessarily mean funding is out of reach. Different lenders have different criteria, and some specialise in working with businesses that banks or mainstream lenders decline.
The key is understanding your realistic options before you apply. Checking eligibility first helps you see which lenders may consider your application without triggering a hard search.
If the options available are not suitable, or if your credit issues are too recent or serious, it may be worth waiting and focusing on improving your position before applying.
Final Thoughts
Credit checks are a normal part of business finance. Understanding what lenders look for and where you stand helps you approach the process with realistic expectations.
If your credit is strong, you are likely to have more options and better terms. If there are issues on your file, knowing about them in advance allows you to address what you can and focus on lenders who may still consider your application.
Checking your own credit before applying is always a sensible step. And checking eligibility through a soft search protects your file while giving you clarity on your options.
Want to understand your funding options without affecting your credit file?
Check your eligibility with Floka in a few minutes. There is no hard search and no obligation to proceed.
Floka Team
Business Finance Experts