How does credit history affect access to external finance?

Credit history significantly influences an individual's or business's ability to access external finance.

A credit history is a record of a borrower's responsible repayment of debts. It is one of the key factors that lenders consider when deciding whether to approve a loan application. A good credit history indicates that the borrower has a track record of paying back loans on time, which reduces the risk for the lender. This can lead to easier access to external finance, potentially with more favourable terms such as lower interest rates.

On the other hand, a poor credit history, characterised by missed or late payments, defaults, or bankruptcy, can make it more difficult to secure external finance. Lenders may view these borrowers as high-risk, leading to loan applications being rejected or approved with less favourable terms, such as higher interest rates or additional security requirements.

In addition to affecting the ability to secure loans, credit history can also impact other forms of external finance. For example, suppliers may be less willing to offer trade credit to businesses with poor credit histories. Similarly, investors may be less likely to invest in a business with a poor credit history due to the perceived higher risk.

Furthermore, credit history can affect the amount of finance a borrower can access. Lenders often use credit history to determine the maximum amount they are willing to lend. Those with good credit histories may be able to borrow larger amounts, while those with poor credit histories may be limited to smaller loans.

In conclusion, maintaining a good credit history is crucial for individuals and businesses seeking to access external finance. It can influence not only the likelihood of securing finance, but also the terms of the finance and the amount that can be borrowed.

Study and Practice for Free

Trusted by 100,000+ Students Worldwide

Achieve Top Grades in your Exams with our Free Resources.

Practice Questions, Study Notes, and Past Exam Papers for all Subjects!

Need help from an expert?

4.93/5 based on509 reviews

The world’s top online tutoring provider trusted by students, parents, and schools globally.

Related Business Studies a-level Answers

    Read All Answers
    Loading...