Can you get a business loan with bad credit?
If you have a poor credit rating or you’re a startup business with little or no credit history, financing might be hard to come by. You might find yourself asking the same question many new businesses ask: can I get a business loan with bad credit?
If you are a UK small business, the answer is ‘maybe’. This short guide will help you understand bad credit business loans and how to get one.
Why might your business have a bad credit score?
A credit score, whether business or personal, is based on a combination of factors. Taken together, these factors give a lender an indication of how likely they think you are to be able to repay your debts. A bad credit score, therefore, is simply a reflection of low confidence in your ability to repay a loan.
Your business credit score could be low for a number of reasons. For example, you may have a history of late payment of bills or have defaulted on loans in the past. Even a history of having applied for a large number of loans could lower your credit score - something to be wary of when making decisions about how to access small business financing.
Lenders will also look at your company’s financial performance - so, if your business hasn’t yet demonstrated that it can make money over a long period of time, that could negatively affect your credit score.
Lastly, your business credit score may also be impacted by your personal credit score, particularly if you have not been running your business for long.
Do business loans use personal credit as lending criteria?
Lenders offering business loans do sometimes use personal credit when assessing loan applications. That’s because personal credit is part of many lenders’ small business loan eligibility criteria.
Any type of lender will look at all available information when deciding on your creditworthiness. So your credit score for a small business loan could be based, in part, on your personal credit history if that helps a lender build up a more complete picture.
However, you will have different credit files for your personal and business credit. So, the more established your business is and the better business credit score you build, the less likely it is that a bad personal credit rating will hurt your chances of getting a business loan.
It is for this reason that it is important to know how to build your business credit score.
How to improve your chances of getting a business loan with bad credit
Getting business loans for bad credit in the UK is far from impossible, particularly with the growth of new, non-mainstream lenders.
The best thing to do, of course, is to improve your credit score (which we will turn to later). But if that isn’t an option in the short term, there are several things to keep in mind when accessing small business loans with bad credit.
First of all, think about reducing how much you want to borrow. Lenders are more likely to lend smaller amounts of money to businesses with bad credit because it means they are taking on less risk. For new businesses in particular, business startup loans for bad credit in the UK may be easier to access if you reduce the amount you are trying to borrow.
You might also want to write a business plan. If you have a poor credit score because your business has not yet proved it can manage its money - and most importantly its debt - in a sustainable way, a well thought out business plan might go a long way to proving to a lender that you can be trusted to borrow money.
Another option for many small businesses is to put up collateral. This means you use assets that you or your business own - such as equipment - as a kind of security to guarantee the loan. This collateral is at risk if you can’t make repayments.
You could, alternatively, find a ‘cosigner’ - essentially a guarantor - who would take on loan repayments if you can’t do so. If this person has a good credit history, it will improve your chances of getting a loan.
How to build your business credit score
The best way to improve your business credit score is to pay your bills and other creditors on time. Over time, this should have the best impact on your score.
It is also wise to keep your overall debt low while trying to build up your credit score - although you should maintain some debt so that you can build up a history.
New businesses should register themselves with a credit reference agency to make sure they don’t go under the radar. Try to keep track of your rating so you can monitor progress. You can regularly check your credit score online and correct any mistakes that might have been made.
Are there any alternatives to business loans for bad credit in the UK?
Bad credit business loans for small businesses can be expensive and not all UK businesses will be able to access them. But there are alternatives.
Bespoke start up loans, secured loans or guarantor loans are ways that businesses with poor credit scores can access finance. But even these are likely to require some level of assurance that you can repay your debts.
It may also be good to understand how to finance a small business without credit whatsoever. Lots of startups can get access to government grants, depending on which sector your business operates in. There are also an increasing number of crowdfunding options available, where you can offer equity in your business to a large number of lenders in exchange for finance.
What do lenders consider when reviewing a business loan application?
Lenders will examine a wide range of things when reviewing any type of loan application. Chief among these will be your business credit score or, if your business has not been running long, your personal credit score.
They will also look at the overall financial health of your business. If the company has been running for a long time and has been profitable, it is likely to work in your favour.
Lenders will also consider your business plan if you have one. The more comprehensive this is, the better your chances of securing a good deal on your loan, whatever your credit score might be.
What is a CCJ?
A CCJ, otherwise known as a County Court Judgment, is a court order used in debt recovery proceedings. If you're in debt and showing no signs of making repayments, your lender can apply for a CCJ to order to repay the money you owe.
A CCJ is a formal letter sent to you from the court demanding the payment of money that you owe. Although this is a very serious letter to receive, it doesn't come without warning. CCJs are usually among the final courses of action a lender will take, and are sent as a consequence of a number of ignored warning letters - only then the lender will decide to take action through the courts.
If you receive a CCJ and it's left unpaid after 30 days, it can have damaging effects on your business and your position as a director. It could stay on your credit file and affect your credit score for up to six years. Not only can this make getting a business loan more difficult, but it can even affect your application for a business energy deal. For more information, check out our guide: does your business credit score affect your energy deal?
But if you pay the required amount back within the first month and fully comply with the action taken againstyou, the CCJ will not be a mark against your credit score.
A CCJ can have a profound effect on your business as it can often indicate that your company is struggling financially. Although this may not be the case, some lenders may be more hesitant to provide you with a loan if a CCJ is attached to your credit score.
Although there are a number of lenders that will accept applications from businesses with a CCJ, having one will really limit your options and the amount you can borrow. You'll also pay more in interest on the amount you borrow as lenders will see you as a bigger risk.
Can you get a business loan with a CCJ?
Yes, but it can be difficult as a CCJ will limit the number of lenders you can compare as well as the amount of money you can borrow. Bad credit lenders will look at your overall credit history and the affordability of the loan rather than just focusing on the CCJ.
If you are struggling to get a business loan, there are a number of ways that you can increase your chances of a successful application such as:
- Paying off your CCJ loans immediately
- Comply with rules to re-build your credit history. For more information, check out Business Debtline.
- Ensure credit score information is accurate
A good credit score is important to any business looking to borrow money, apply for finance, or get any type of credit. If you follow the steps listed above you should be able to build or rebuild your credit score, which should help your chances of acceptance. But it doesn't guarantee your loan application will be accepted.
How to compare business loans with Bionic
Whether you have a bad credit history or not, Bionic can help you compare small business loans.
Working with Think Business Loans, the finance division of Bionic, we can search from dozens of lenders to find the right loan to help your business grow. Our team will talk you through what kind of loans are available to you, and crucially how much they will cost you.
Give us a call today on 0800 860 6833