A short guide to business loans with bad credit

Having a poor credit history can often hinder business finance applications, especially through the more traditional routes. If you believe your credit file is working against you it can be a frustrating time, especially if you're looking to push forward your business but have nowhere to turn.

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A short guide to business loans with bad credit

It’s undeniable that a poor credit rating can make it hard to get money via traditional lending sources. That being said, there are methods to improve your score along with secured and unsecured funding options, which can be used to circumvent a bad credit score.

What is a bad credit score?

When a business or business owner is considered to have a bad credit score, a lender defines this as a history of not repaying loans on time, whether partially or in full, and has demonstrated a poor credit history in the past. 

Small businesses who have applied for business funding, have taken out a small business loan or used a business credit card to pay a bill will have a credit rating. This credit file will include the sum of money borrowed, the repayment time frame, and most importantly the regularity and completeness of amounts repaid or not. Any previous credit checks will be visible to new lenders, and this can influence their decision to issue a new loan or not. A bad credit score can equate to higher interest rates and less favourable terms, or in the worst-case scenario the rejection of a loan application.

Can I get a business loan with bad credit?

It might be the case that your business experienced an unexpected cash flow problem and wasn’t able to meet repayments on a loan. These things happen. A business with bad credit might find that its finance options are limited with a bad credit score, but as you commit to gradually improving your score by paying off outstanding debts and proving reliability, new lending opportunities will open up to you.

Bear in mind that a business without a demonstrable trading history might also struggle to get funding as it will be deemed risky by lenders. It’s important to remember not to apply for dozens of loans, as this will further tarnish your credit score. In situations where you need to apply to a lender that is sympathetic to businesses with bad credit ratings, it might make sense to use a credit broker or a lending platform like Funding Options, where you are matched with lenders based on your particular set of requirements and financial position. However, you will have to offer up a personal guarantee and will most likely have to pay higher interest rates. 

How can I get a business loan with bad credit?

It is still possible to get loans with bad credit from several specialist lenders and high street banks. Of course, a lot will depend on your business plan and your ability to prove that your cash flow situation will remain healthy over the long term. If your business is willing to offer up business assets as collateral then a secured business loan might be worth applying for.

The lender might agree to lend you money to a ratio of the value of the asset(s) put forward as security. These can be plant and machinery, or cash. There is also the option of an unsecured business loan. These come at a cost of higher interest rates, and they will require a director or business owner to cover missed loan payments in the case of a default situation. An unsecured loan might be well suited to a young business, a business with a poor credit score, or businesses without many assets.

Peer-to-peer lending is also worth considering. It is more or less the same as applying to any other business lender. They will request your turnover, profit and loss accounts, and 12-month trading history. As a business with poor credit, you will be less likely to be accepted unless you have a strong business plan, with convincing cash flow projections. Once you’ve passed their acceptance criteria, your loan will be published on their platform, for private investors to offer small amounts that in total will hopefully meet your target borrowing amount.

Business credit cards with bad credit are also on the market and might be a chance to avoid paying high interest rates. Paying back a credit card in full monthly is a great way to rebuild your credit history. Bear in mind that credit limits will be set to a low limit ( <£1,000) and APR will be high.

What are the costs of loans with bad credit?

It’s not an ideal situation to be in. The interest rates that you will have to pay will be much higher with a negative credit history. You might also have to pay fees for early repayments and similarly for late payments. 

How can I improve my credit score?

It’s advisable to address a bad credit score first before accumulating more debt. You can do three things to help your score.

  • Audit your credit report. To identify potential pitfalls early, you should review your credit ratings regularly by requesting your credit reports. Credit reports are created by credit reference agencies. They use lending data to create these reports and you receive a score which reflects the chances of you repaying a loan.

  • Pay for everything on time. Failing to pay back loans on time or credit cards can hurt your business credit score. If you miss payments repeatedly your score will disimprove. Credit agencies who supply the credit rating will have visibility into your business's financial history including any default payments and County Court Judgements (CCJs).

  • Credit card applications. Please remember that every credit application you make will be visible on your credit report. In other words, when a lender rejects your application, it could harm your credit score. This includes credit card applications.

If you need business debt advice, visit the Business Debtline.

Can I apply for a business loan with bad credit?

It very much depends on your circumstances and willingness to use different forms of security, but it is possible to get a business loan with a bad credit history. It’s always worth speaking to a specialist about sourcing finance, especially if your credit file is poor.

Often, businesses that experience financial difficulties would look to take up a finance solution, more often than not, by visiting their bank. However, due to various reasons, the bank is no longer an option for many small firms, let alone business owners with poor credit histories. Because of this, we're starting to see more and more lenders who provide alternative methods of lending.

It's important to remember that with the boom of alternative lending platforms in recent years, more and more lenders provide finance options for businesses with bad credit — meaning the issue is becoming less and less relevant to finance applications.

Alongside this, there are various grants and government initiatives to help businesses grow and survive – after all, making a business work rather than stop trading is a benefit to the UK economy, in the long run, so help and advice are regularly available.

What does it mean for my business?

Even if you have a chequered financial history there are still solutions available to you. A lending platform will, for example, help you get the best lending match possible.

Here’s what to look out for. If you recognise that your business is in a similar position, don’t be put off searching for finance – there may still be a solution for you:

Business CCJs

Lenders take into account how many you have, their value and the frequency at which you have received them.

Learn more about business CCJs.

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Winding orders

If you have been subject to this order in the past (even if it has been rejected) this could affect your finance applications.

Looking for finance?

Let us help you find the best financial product in the market. We will guide you through the whole process and make sure you get the best deal.

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Visible financial performance

When performing checks on your company, lenders often take a look at public data about your company. Even if you don’t believe the information is correct, some of the more traditional lenders will make assumptions based on your net worth and whether or not you hold a healthy amount of cash in your business.

Looking for finance?

Let us help you find the best financial product in the market. We will guide you through the whole process and make sure you get the best deal.

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Directors' history

If there are failed or underperforming businesses with common directorship, this could influence the way lenders perceive your business – even if it performing well.

Looking for finance?

Let us help you find the best financial product in the market. We will guide you through the whole process and make sure you get the best deal.

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People behind the business

If people involved with the business have a personal history of IVAs, debt management plans or anything similar, it could prove to be difficult to source finance.

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Let us help you find the best financial product in the market. We will guide you through the whole process and make sure you get the best deal.

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So how does it work?

As lenders require some kind of security to provide finance to businesses, we're seeing more creative methods of finding it. This can be done in a number of ways, and lender terms differ on a deal-by-deal basis. Overall, companies are getting more tailored solutions, which is a great sign of a flourishing industry that caters to small businesses.

For example, instead of looking at company Directors, certain lenders are willing to take into account strong turnover as a sign of a viable business, or some providers will use guarantees, or assets to secure funding. There are numerous possibilities.

What’s available to me?

Because these lenders provide tailored business loans, more businesses are now able to access finance solutions by using different forms of security.

Turnover Loan

If you have a strong credit score and a business operating at a healthy turnover, even with a history of past issues you could still be eligible for a loan based on your business’s turnover

Looking for finance?

Let us help you find the best financial product in the market. We will guide you through the whole process and make sure you get the best deal.

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Asset Finance

For businesses that are asset-rich and cash-poor, there's a high probability that lenders are willing to take equipment, vehicles, or commercial property as security. This guarantees them a lower-risk investment, as they're more focused on the security available than anything else.

Looking for finance?

Let us help you find the best financial product in the market. We will guide you through the whole process and make sure you get the best deal.

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Invoice Finance

Usually in the form of factoring, some lenders will look past credit history and financial issues if the business being operated is functioning well and has debt owed to it in the form of invoices. With many variables, it's worth speaking to a specialist about invoice finance. If your business is suitable, it could be a useful solution that not only serves as an alternative way of sourcing finance, but helps you secure a more efficient income by fast-tracking invoice payments.

Learn more about invoice finance.

Looking for finance?

Let us help you find the best financial product in the market. We will guide you through the whole process and make sure you get the best deal.

See your Funding Options

Business Loans For Bad Credit

Check your eligibility with our online form without affecting your credit score.

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