Banks urged not to ‘label’ people with low credit scores
A low credit score should not prevent someone from securing a loan to start a business, according to the founder of a community lending charity who believes banks are overlooking a significant pool of talent. Karen Davies, who established Purple Shoots to provide credit for individuals rejected by mainstream lenders, has emphasised that traditional financial institutions are missing opportunities by relying too heavily on credit scores. Her perspective comes at a time when many individuals with poor credit histories are struggling to access the financial support needed to rebuild their lives and pursue entrepreneurial ambitions.
Tiffany Bramley knows all too well how rigid credit scoring systems can impact life opportunities. She was successfully running her cleaning business in southern England in 2014 when tragedy struck. Complications with her pregnancy necessitated an emergency Caesarean at 32 weeks, and her baby daughter, Tianie, sadly died. “It was like walking through hell,” Bramley recounts. The devastating loss led her to relocate to Cardiff to be closer to friends and family who could provide emotional support during this incredibly difficult time.
Whilst dealing with the overwhelming grief of losing Tianie and managing funeral arrangements, Bramley missed several payments on her financial commitments. These missed payments significantly affected her credit rating, creating a secondary challenge during an already traumatic period. Despite this setback, Bramley was determined to restart her business as a way to regain some control over her life. “It’s like a firework that goes up and just scatters—that’s how my life had just exploded,” she explained. “I needed to restart the business to feel like I had some control over my life again.”
The challenge of obtaining finance with poor credit
When Bramley approached her bank for a small business loan, she was rejected despite their “sympathetic” response to her situation. The bank’s decision was primarily based on her damaged credit score rather than her business acumen or determination. “They tend to just label people, and that needs to change,” Bramley noted. This experience highlights a common issue in the UK banking sector, where automated credit scoring systems often fail to consider the nuanced circumstances behind financial difficulties. For many individuals like Bramley, these rigid systems create seemingly insurmountable barriers to financial recovery and business development.
Fortunately, Bramley’s bank suggested she contact Purple Shoots, a community lending charity founded by Karen Davies. “That’s when I met Karen,” Bramley said. “She was the one who gave me that hope and believed in me.” Through Purple Shoots, Bramley secured a £3,000 loan to relaunch her business, Tiff’s Cleaning Angels, in Cardiff. She has since successfully repaid the loan and rebuilt her business. For those facing similar challenges with traditional lenders, bad credit loans can provide a vital lifeline, offering opportunities to those who might otherwise be excluded from financial services due to past difficulties.
Purple Shoots takes a fundamentally different approach to lending than mainstream banks. “We’re looking at the person and what they’re like,” Davies explained. “And we’re looking at the business plan and whether it’s going to be viable.” This people-centred methodology allows the charity to look beyond credit scores and assess the potential of both the individual and their business idea. Since its establishment twelve years ago, the not-for-profit organisation has supported nearly 1,000 new businesses with loans of up to £5,000. In the 2023-24 financial year alone, the charity provided 69 loans, creating 104 new jobs, frequently in economically deprived communities.
High risk, high reward approach
Davies openly acknowledges that her organisation’s approach carries greater risk because their clients are “starting with absolutely nothing but our loan.” She understands that if something goes wrong, it will impact their ability to repay. More than half of Purple Shoots’ borrowers fall behind on their loan payments at some point, but the charity accommodates these difficulties because they prioritise the long-term success of the businesses they support. Despite these challenges, the actual failure rate is around 20%, which is remarkably low considering the high-risk profile of the borrowers.
The impact of this alternative lending model can be transformative for individuals who have been excluded from mainstream financial services. “People who’ve been struggling on benefits can create an income,” Davies noted, allowing them to start paying taxes and contributing to the broader economy. This approach demonstrates that with appropriate support and flexible lending criteria, individuals with poor credit histories can successfully establish and maintain viable businesses. Community lenders like Purple Shoots effectively bridge the gap between those with damaged credit scores and the financial resources they need to improve their circumstances.
Sam Rex-Edwards from Finance Innovation Lab, a charity campaigning for reform of the financial system, believes mainstream lenders should make affordable lending more accessible to those with low credit scores. Rex-Edwards advocates for a “fair banking” law that would place obligations on banks and other lenders to offer more support to those who currently struggle to access credit. “Too many people are having to pay a poverty premium through using high-cost credit like payday loans,” she stated. “And too many small and medium-sized businesses can’t flourish because they’re also refused credit from High Street banks.” Her concerns highlight the broader economic impact of restrictive lending practices, which can stifle entrepreneurship and economic growth, particularly in underserved communities.
There is some government-backed support available for small businesses through organisations like the British Business Bank and the Development Bank of Wales, both of which offer micro-loans for business start-ups. The British Business Bank reported providing “5,165 loans worth over £53 million to startups in Wales since 2012.” Additionally, UK Finance, which represents the financial services sector, stated that the banking and finance industry was “on course to provide over £60 billion” in finance for small businesses in the UK this year. A spokesperson for UK Finance noted, “Last year we saw an increase in the amount of lending to small and medium enterprises in Wales, as well as more loan applications being approved. Banks also support other organisations, like non-bank lenders and charities, which help businesses that find it challenging to access mainstream finance.”
Despite these positive developments, many individuals with damaged credit histories continue to face significant barriers when seeking financial support. Alternative lenders offering bad credit loans and community lending organisations like Purple Shoots play a crucial role in providing opportunities for these individuals. By looking beyond credit scores and considering the person behind the application, these organisations are challenging traditional banking models and demonstrating that past financial difficulties do not necessarily predict future success. As more success stories like Tiffany Bramley’s emerge, there is growing evidence that a more inclusive approach to lending can benefit not only individuals but also the wider economy through increased entrepreneurship and job creation.
