Contributed content: this article was written by a third-party contributor and does not necessarily reflect the views of Financial News. Editorial and Advertising Policy
People assume a lot about businesses with poor credit scores. The thinking goes like this: if the score is low, something must be wrong with the company, whether that’s bad leadership, a dodgy business model, careless spending, or directors who just didn’t care enough. Sounds logical enough. But the reality across UK business lending doesn’t actually support that story, and the data makes this pretty clear once you dig into it.
PwC’s analysis of Insolvency Service figures found that over 95% of companies entering insolvency in England and Wales in 2025 had annual turnover below £1 million. These weren’t large firms brought down by incompetent boards. Many were small, owner-managed companies scraping by in sectors where margins barely exist on a good day.
And here’s the thing that really matters: the credit markers they pick up during a rough period don’t vanish once they stabilise. They hang around, dragging the score down long after the company has turned a corner. So what actually causes those marks to appear on an otherwise decent business, and why does the system keep holding it against companies that have already fixed the problem?
Where the Markers Concentrate
Look at which sectors are driving insolvency volumes. The same names keep coming up. Insolvency Service figures show construction made up 17% of company insolvencies in England and Wales in 2025, wholesale and retail accounted for 16%, and hospitality made up 14%. Between them, those three industries accounted for close to half of all company insolvencies where the sector was recorded.
These aren’t industries full of amateurs. They’re defined by brutal payment cycles, paper-thin margins and heavy exposure to costs completely outside their control. A construction subcontractor doesn’t collapse because the team forgot how to do the job. It collapses because a main contractor went bust owing £80,000, and there was no way to plug that cash flow hole quickly enough. A restaurant doesn’t shut its doors because the food was terrible. It shuts down because energy bills doubled inside a year while footfall dropped by a fifth, and the maths just stopped working.
Late payment alone leads to around 50,000 business closures a year, according to FSB research cited by the government when it announced its crackdown on late payers. That doesn’t point to poor management. It points to a payment culture that hits the smallest companies hardest, and a credit system that records the damage without caring about the cause.
What Automated Underwriting Actually Measures
High-street business lending in the UK mostly runs through automated credit-scoring systems now. Algorithms pull data from the major credit reference agencies, check it against internal risk models, and spit out a yes or no. Takes seconds. Costs the lender next to nothing.
But these systems measure credit history, not how a business is performing right now. A company that had a disastrous 2023 but has been trading profitably for two solid years since will still carry marks from that earlier period on its file. A CCJ paid in full within a month of judgment can be removed from the register entirely, but pay it any later and it will stay on file for six years, marked as satisfied. The algorithm has no idea that revenue bounced back, that the debt was settled, that new clients came on board, or that the director completely restructured payment terms to prevent the same thing happening again. All it sees is the flag, and it moves on to the next application.
The result is a market that misprices a whole pool of borrowers. Plenty of fundamentally sound businesses get shut out of mainstream finance based on data that only looks backwards, so their cost of capital ends up higher than it should be. Many of them take on expensive short-term debt or skip growth opportunities altogether, because nobody will lend to them on fair terms.
Who Lends to the Mispriced Segment
A growing chunk of the UK's alternative lending market exists specifically because of this gap. Specialist lenders and brokers offering business loans for bad credit tend to underwrite manually, looking at current trading performance, asset positions and the actual story behind any adverse markers on file. The way they assess a business is fundamentally different from what high-street banks do, and for companies stuck between a bad score and strong real-world performance, this is often the only route to funding that reflects where they actually stand.
Asset-backed products have grown quickly in the UK over the past decade for the same reason. Invoice finance, equipment leasing and merchant cash advances all tie the lender’s security to something concrete, whether that’s a debtor book, a piece of machinery or a stream of card transactions, instead of relying on a credit history that might not match reality anymore.
A Correction That’s Already Underway
The UK’s alternative finance market has expanded significantly. Challenger and specialist banks now provide the majority of gross SME bank lending, up from well under half in 2012, and they’ve out-lent the big five every year since 2021. But the gap hasn’t fully closed. Thousands of viable businesses are still getting priced out of growth capital because their credit file carries a marker from a period that no longer reflects how they trade today.
That’s why the way a lender reads your file matters as much as the file itself. A lender that can tell apart a company that genuinely almost failed from one that just hit a rough patch will price the risk on where the business stands today, not where it stood two years ago.
Nobody seriously disputes whether these businesses deserve better access to finance at this point. The data already answers that question. What remains to be seen is how fast the rest of the lending infrastructure catches up with what the numbers have been saying for years: a credit score captures a moment in the past, and it’s a surprisingly poor predictor of what comes next.
