What is a credit score: How lenders see sole traders and what that means for getting van or truck financing

What is a credit score? Why do lenders use it when determining whether or not to lend to you? Is it possible to get a commercial vehicle loan as a sole trader or small business owner if you don't have a good credit score? And are there any alternatives you should know about? These are some of the important questions we'll examine in this blog post.
WHAT IS A CREDIT SCORE

Table of Contents

A person’s credit score is one of the most significant factors in their financial life. It’s the score that lenders use to determine whether or not to give you a loan, and it can often be a good indicator of your financial health. 

In fact, if you’re looking for a new truck loan, van loan, or any type of commercial vehicle financing, your lender will likely want to see your credit score before they lend you any money.

What is a credit score and how does it work?

A credit score is a measurement of your credit history that lenders use to determine whether or not you are a safe and reliable borrower.

It’s important to be aware of how your credit score works so you can give yourself the best chance of securing the financing you’re after.

Although credit bureaus haven’t revealed their exact formula for calculating credit scores, various factors have been shown to influence their calculations including, but not limited to:

  • Your payment history (mainly how many late payments you have on record)
  • The types of credit you have 
  • How long you’ve held each type of account open
  • How much money is owed on loans or credit cards
  • How much of your credit limit is used
  • How long it’s been since you last paid a bill
  • Whether you have multiple lines of credit
  • How many credit applications you’ve made in the past five years

What makes up your credit score? A few things...like your repayment history, credit enquiry, length of credit, personal information, and any credit limits or adverse events you might have.

If you’re a sole trader or small business owner wanting commercial vehicle financing, then knowing what lenders consider ‘good’ and ‘bad’ in terms of your credit score is important.

Credit scores differ between each of the bureaus, but are generally mapped out on a five-point scale – below average, average, good, very good, and excellent.

Here’s what that looks like for Experian and Equifax:

A table showing the difference in credit score calculations from Experian and Equifax
Sources: Experian and Equifax

Why do lenders use credit scores?

Lenders look at your credit score to see how much you pay off on a regular basis (usually monthly). 

If you’re paying more than the minimum required on all your payments, it shows that you’re ‘current’. Lenders like to see this because they want to know that you’re responsible with your money and that you’re making an effort to stay out of debt. 

On the other hand, if you have lots of late payments, it might indicate to a lender that you’re not managing your finances well.

If you’re keen to know what lenders are looking at when they check your credit score, you can request a copy of your credit report yourself from one of the three credit bureaus that calculate your credit score – Equifax, Experian, and Illion.

You can also check out our step by step on how to do a credit score check with any of these bureaus.

Your credit report will show information about your credit history, including any unpaid bills, credit cards, collections, and other debts. It also lists whether you’ve been sued or had any bankruptcies or serious credit infringements.

Ultimate credit score guide for sole traders 1

Why is a credit score important when you’re after van or truck financing?

When you’re after almost any type of financing as a sole trader, your credit score will play a significant part (if not the main part) in the lender’s decision making. So it’s important to be aware of how a credit score works

The most obvious benefit of your credit score is that it can help you get approved for a van or truck loan. Having a good credit score makes it easier for lenders to offer you a favourable rate, because they feel more confident that you’ll be able to keep paying off the loan without any major issues. 

Keep in mind, however, that when you’re self-employed you’ll likely have to provide some alternate documentation when applying for commercial vehicle financing.

This could be because you don’t have some of the standard documents that lenders ask for, e.g. like regular pay slips. So you might be asked to show a couple of years of your business’ financial statements instead (e.g. like profit and loss statements and balance sheets). Each lender will be able to tell you exactly what they need from you so it’s best to ask them for a detailed list.

It’s also worth mentioning that getting financing for a vehicle will largely depend on you having a good credit score. Below, we cover off some basic ways to improve your credit score if you think yours isn’t up to scratch, but you can also find a more detailed article on how to fix your credit score here.

If your credit rating gets a thumbs up from your lender, and you get approved for a van or truck loan, you’ll get assigned a credit limit based on what the lender has assessed you can afford to pay back regularly.

Your credit limit is the total amount of money you can borrow from the lender.

It’s a good idea to have a few different vehicles in mind (or the same vehicle from a few different dealers or sellers) because your credit limit may be above or under what you were expecting and you don’t want to waste time looking for alternatives once you’ve been approved. It’s always good to have done that homework ahead of time.

Can I get a commercial vehicle loan with bad credit?

We’ve all heard the phrase “you shouldn’t judge a book by its cover”. But what about its credit score?

As a sole trader or small business owner, a poor credit score can seriously hinder your ability to get approved for a commercial vehicle loan. 

However, it’s still possible to get a loan – but you’re probably looking at much longer time frames for approvals and it’s highly likely that it’ll be more expensive.

What you’ll probably need to do is shop around for a lender who’s willing to work with you and who has the experience to help with your particular situation.

Alternatively, you can focus on improving your credit score so that you open up opportunities for yourself to get approved for a broader range of credit options.

How do I fix my credit score?

If you have a credit history that’s suffered due to missed payments, late fees, or other credit problems, it may take a few years to rebuild a credit score that shows improvement.

Dedicating your focus to it, and working on it consistently, can have a lot of positive impact.

credit score image

There are several ways to improve your credit score including (but not limited to):

  • Make payments on time – Your payment history is a big factor in your credit score. For some people, it’s the most important factor. That’s why it’s important to ensure you make your repayments on time to help you improve your credit score.
  • Space out your credit applications – When you apply for credit with a lender, they look at your credit report and it registers as a hard enquiry which then shows on your report. If you’ve got multiple applications within a short amount of time, lenders and credit providers looking at your report might think you’re experiencing financial difficulty and could reject you for a loan because of it. That’s why spacing out your credit applications can work in your favour.
  • Consider keeping credit accounts open – The length of your credit history is a factor in determining your credit score. The longer you’ve had a credit account open, the more data there is to use to calculate your credit score – especially if it demonstrates that you can consistently handle a line of credit. So, where appropriate – and where it doesn’t cause you any financial distress – consider keeping the credit account open.

I don’t have a few years to fix my credit score. I need a commercial vehicle now. Are there any alternatives to financing?

While you’re capable of taking the right steps to repair your credit score and getting the commercial vehicle financing you need, we understand that often sole traders and small business owners just don’t have the luxury of time.

You’ve probably got a job lined up – ready to go right now – and the only thing standing in your way is the need for your own vehicle to get the job done.

That’s where ARG’s Rent To Buy solution comes in

In a nutshell, Rent To Buy is a leading alternative to commercial vehicle financing for people with bad credit scores. 

It gives you instant access to the vehicle you need – allowing you to start earning money straight away, while giving you a path to buying it outright. There are also no loans involved, meaning you’re not pulled into financing before you’ve even had a chance to get out of the gate.

And the good news is that, with Rent To Buy, ARG does all the heavy lifting for you upfront.

Find out more about ARG and how you can Rent To Buy the work vehicle you need.


Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.