If you’ve ever applied for credit from suppliers and been refused, you might be wondering why. Credit is the ability to borrow money or goods with the agreement to pay back the lender or supplier at a later date.
It is an essential component of business transactions, as it enables businesses to manage their cash flow, make purchases, and invest in growth opportunities.
For businesses, having access to credit is crucial for survival and growth. It allows them to buy goods and services they need to operate and expand, such as raw materials, equipment, and inventory, without having to pay upfront.
Credit can also help businesses establish and maintain positive relationships with their suppliers by showing that they are trustworthy and reliable. However, being refused credit from suppliers can be a major setback for businesses, as it can limit their ability to operate effectively and grow.
Credit refusal occurs when a supplier declines a business’s request for credit. There are various reasons why this may happen, including inadequate credit history, poor credit score, insufficient income, overextended credit, unpaid bills or defaults, and being in a high-risk industry.
When businesses are refused credit from suppliers, it can have negative impacts on their operations, credit score, and ability to secure credit from other suppliers. Therefore, it’s essential to understand why credit refusal may occur and take steps to prevent it from happening in the future.
Reasons for credit refusal by a supplier
Credit refusal can be frustrating and can leave businesses wondering what went wrong. It’s important to understand the reasons why credit may be refused so that businesses can take steps to address any issues and prevent it from happening in the future. Some common reasons why businesses may be refused credit from suppliers include inadequate credit history, poor credit score, insufficient income, overextended credit, unpaid bills, invoices or defaults, and being in a high-risk industry.
Here are a number of reasons why a supply may refuse credit:
- Inadequate credit history
Inadequate credit history is a common reason for a supplier not to offer credit terms. Suppliers want to be sure that the businesses they are extending credit to have a track record of paying their bills on time. Without a credit history, suppliers have no way of knowing if a business will be able to pay its bills on time. It’s important for businesses to establish a business credit score by paying bills on time and using credit responsibly.
- Poor credit score
Poor credit score is another reason for credit refusal. A business rating score is a numerical representation of a business’s creditworthiness. The score is based on factors such as payment history, outstanding debt, length of credit history, and types of credit used. A low credit score can signal to suppliers that a business may be a risky borrower, and may lead to credit refusal.
- Insufficient income
Insufficient income is another reason why businesses may be refused credit. Suppliers want to be sure that a business has enough income to cover its expenses and pay its bills on time. If a business’s income is too low, suppliers may view it as a risk and refuse credit.
- Overextended credit
Overextended credit is when a business has taken on too much debt relative to its income. This can signal to suppliers that the business may have difficulty paying its bills on time, and may lead to credit refusal. It’s important for businesses to manage their credit responsibly and avoid taking on more debt than they can afford.
- Unpaid bills or defaults
Unpaid bills or defaults are another reason for refusal. If a business has a history of not paying bills or invoices on time or defaulting on loans, suppliers may view it as a risky borrower and refuse credit. It’s important for businesses to pay their bills on time and work to resolve any outstanding debts.
- Being in a high-risk industry
Being in a high-risk industry is another reason why businesses may be refused credit. Some industries, such as construction or hospitality, are considered high-risk because they are more prone to economic downturns or other risks. Suppliers may be more cautious about extending credit to businesses in high-risk industries, which may lead to credit refusal.
There are many reasons why businesses may be refused credit from suppliers. Inadequate credit history, poor credit score, insufficient income, overextended credit, unpaid bills or defaults, and being in a high-risk industry are all factors that can lead to credit refusal.
To prevent credit refusal, businesses should establish a strong credit history, manage their credit responsibly, pay bills on time, resolve outstanding debts, and operate in a low-risk industry if possible.
By doing so, businesses can improve their chances of obtaining credit from suppliers and successfully managing their cash flow.
What Impact does credit refusal have on a business
The impact of being declined for supplier credit on a business can be significant, and it can affect various aspects of the business’s operations. When a business is refused credit by a supplier, it can lead to negative effects on its cash flow, credit score, customer base, and ability to obtain credit from other suppliers.
One of the most significant impacts of credit refusal is on a business’s operations. Without access to credit, businesses may have difficulty managing their cash flow and paying their bills on time. This can lead to late fees, penalties, and other charges that can further strain the business’s finances.
Credit refusal can also have a negative impact on a business’s credit score. When a supplier declines a business’s request for credit, it may report this to credit bureaus, which can damage the business’s credit standing. A low credit score can make it more difficult for businesses to obtain credit in the future, which can limit their ability to grow and expand.
Another impact of credit refusal is the potential loss of customers. When businesses are unable to obtain credit from suppliers, they may not be able to provide goods and services to their customers in a timely manner, which can lead to dissatisfied customers and lost sales. Additionally, if a business’s creditworthiness is called into question, it may lose potential customers who are hesitant to do business with a risky borrower.
Difficulty in obtaining credit from other suppliers is another impact of credit refusal. When one supplier declines a business’s request for credit, it may signal to other suppliers that the business is a risky borrower. This can make it more difficult for businesses to obtain credit from other suppliers in the future, which can limit their ability to manage their cash flow and invest in growth opportunities.
Being refused credit by a supplier can have a significant impact on a business’s operations, credit score, customer base, and ability to obtain credit from other suppliers. It’s important for businesses to understand the potential impacts of credit refusal and take steps to prevent it from happening in the first place.
By establishing a strong credit history, managing credit responsibly, paying bills on time, and resolving outstanding debts, businesses can improve their chances of obtaining credit from suppliers and successfully managing their cash flow.
Steps to take when credit is refused
When credit is refused by a supplier, there are several steps businesses can take. First, it’s important to find out why it was refused and address any issues that may have contributed to the refusal. This may involve improving credit history or score, reducing debt, or resolving outstanding debts.
Businesses may also want to consider alternative sources of funding, such as loans or crowdfunding, to help manage their cash flow. Finally, businesses should continue to maintain good relationships with suppliers and work to improve their creditworthiness to increase their chances of obtaining credit in the future.
Here are 7 steps to take if a supplier has refused your business credit:
- Request for an explanation
It’s important to request an explanation for the refusal. This can help you understand the reasons behind the decision and identify any areas where you may need to improve. You can start by contacting the supplier directly and asking for an explanation.
This may involve providing additional information about your business or addressing any concerns the supplier may have. By seeking an explanation for the credit refusal, you can gain valuable insights into your business’s creditworthiness and take steps to improve your financial standing in the future.
- Appeal for reconsideration
It may be possible to appeal for reconsideration. This involves reaching out to the supplier and making a case for why your business should be granted credit. When appealing for reconsideration, it’s important to provide any additional information that may support your request, such as financial statements or credit history. You may also want to address any concerns or objections the supplier may have had about your creditworthiness.
While there is no guarantee that your appeal will be successful, making a case for why your business deserves credit can demonstrate your commitment to responsible credit management and may improve your chances of obtaining credit in the future.
- Offer the supplier up to-date financials
Offering up-to-date financials such as filed accounts, management accounts, and bank statements can help demonstrate your creditworthiness and improve your chances of obtaining credit in the future. These financial documents can provide the supplier with a clear picture of your business’s financial health and help address any concerns they may have had about your creditworthiness.
By providing this information, you can demonstrate your commitment to responsible credit management and improve your chances of establishing a strong credit relationship with the supplier.
- Review of credit history and score
It’s important to review its credit history and score. In the UK, there are three main credit agencies: Equifax, Experian, and TransUnion, which maintain credit reports on businesses and individuals.
These reports provide information on credit history, outstanding debts, and other factors that can affect creditworthiness. Reviewing your business’s credit report can help you identify any areas where improvements can be made, such as paying bills on time, reducing outstanding debts, or resolving any defaults or CCJs.
Additionally, the Credit Industry Fraud Avoidance System (CIFAS) is a not-for-profit organization that helps protect businesses and individuals against fraud. Checking your business’s CIFAS report can help identify any instances of fraud or suspicious activity that may be affecting your creditworthiness. By reviewing your credit history and score and addressing any areas for improvement, you can improve your chances of obtaining credit from suppliers in the future.
- Improvement of credit score
Some steps that businesses can take to improve their credit score include paying bills on time, reducing outstanding debts, and resolving any defaults or CCJs. It’s also important to ensure that your business’s credit report is accurate and up-to-date, as errors can negatively impact your credit score.
By monitoring your credit report regularly and addressing any issues as they arise, you can help ensure that your business’s creditworthiness is strong and that you are in a better position to obtain credit from suppliers in the future. Additionally, working with credit counsellors or financial advisors can provide guidance and support for improving your credit score and managing your business’s finances more effectively.
- Finding alternative suppliers
It may be worth considering alternative suppliers. This can involve researching and identifying suppliers that offer more favorable credit terms or that specialise in working with businesses with lower credit scores.
Additionally, exploring alternative financing options, such as loans or invoice finance, can help provide the cash flow necessary to continue operations while working to improve your credit score. It’s important to approach new suppliers with a strong credit pitch, highlighting your business’s strengths and demonstrating your commitment to responsible credit management.
By expanding your network of suppliers and exploring alternative financing options, you can help ensure that your business has the resources necessary to thrive, even in the face of credit refusals.
- Consider an insolvency process
If your business is overcapitalised, it may be worth considering an insolvency process such as a Company Voluntary Arrangement (CVA) or Creditors’ Voluntary Liquidation (CVL).
A CVA involves negotiating with creditors to repay debts over an extended period of time, while a CVL involves liquidating the business’s assets to repay creditors.
While both processes can be challenging, they may be necessary to avoid further financial hardship and to ensure that the business is able to move forward on a more stable financial footing.
It’s important to consult with a qualified insolvency practitioner or financial advisor to determine the best course of action for your business, as each situation is unique and requires a tailored approach. By taking proactive steps to address overcapitalisation and financial difficulties, businesses can help ensure that they are able to continue operating and to thrive in the long term.
Frequently asked questions
There are several reasons why a supplier may refuse credit to a business, including inadequate credit history, poor credit score, insufficient income, overextended credit, unpaid bills or defaults, or the business operating in a high-risk industry.
If a supplier refuses credit to your business, you can take several steps to improve your chances of obtaining credit in the future. These may include reviewing your credit history and score, offering up-to-date financial documents, such as filed accounts and bank statements, and exploring alternative suppliers or financing options. Why have I been refused credit from suppliers?
What can I do if a supplier refuses me credit?
Conclusion
In conclusion, being refused credit by a supplier can be a frustrating experience for any business owner. However, by understanding the reasons for credit refusal and taking proactive steps to address any issues, businesses can improve their creditworthiness and increase their chances of obtaining credit in the future.
If you have been refused credit and need to restructure your business, we are here to help. Contact us via our website for guidance and support on how to navigate the complexities of the credit system and ensure that your business is able to move forward on a more stable financial footing.
Together, we can help your business thrive, even in the face of your suppliers unwillingness to offer credit.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.