Bad credit is not necessarily a bar to securing a loan for your business. However, having a poor credit score can make this process more challenging and the terms of the loan can be less favourable.
The following guide looks in detail at how to get business loans for bad credit, including what is meant by a bad credit score and the types of loans potentially available to those rated as high risk from a lender’s perspective.
What is meant by a bad credit score?
A credit score is the rating given by one of the UK’s main credit reference agencies that collect credit information, such as Experian and Equifax, to indicate how creditworthy a person or business is, based on the credit history of that individual or company. As such, you will not only have a personal credit rating, but also a separate rating for your business.
In either case, a bad credit score is essentially one which suggest to lenders looking to advance borrowing, that you and/or your business are unlikely to repay your loan.
There are several factors that can negatively impact both your personal and business credit scores, the most obvious being where you have defaulted on a previous credit facility, such as making late repayments on a credit card or loan, or exceeding an overdraft limit. The more times you default, where either you or your business have continually made payments late, or missed them completely, the lower your personal or business credit scores are likely to be. A low rating could also result from failing to pay bills on time, such as utility bills or business invoices, or any other creditor to whom money is owed. Further, where a debt has led to a county court judgment, this is likely to have a significant impact on your score.
However, a bad credit score is not always because an individual or business has continually made payments late or missed them completely, where the number of times that you have applied for credit in the past can also adversely affect your rating. In some cases, multiple applications within a short space of time can easily turn a good score into a bad one, not least if you and/or your business have previously been rejected for finance. A low rating can also be as a result of never having taken any credit at all. This is because most lenders like to see a proven track record of sensible borrowing, which helps them to decide whether or not you are likely to pay them back on time if your application is approved.
Why do bad credit scores matter?
Your business credit score works a lot like your personal one, where this is one of the main things that banks and other finance providers will use to make decisions about lending.
However, both your personal and business credit scores are important because these can each directly impact your ability to secure lending for your business. In many cases, when applying for a business loan, the lender will want to check your personal credit rating, in addition to that of the business. This is because, when offering lending by way of a business loan, they may also want a personal guarantee, making you responsible for your company’s debt in the event of any default. This may be a standard requirement for the lender, or only where there are concerns over the credit history, age or financial stability of your business.
A bad credit score, even if you are approved for lending, will also impact how much you can borrow and the terms on which you will be approved. In particular, a bad score can lead to higher interest rates and other less favourable terms, if not outright rejection.
Can you get a secured business loan for bad credit?
Broadly speaking, business loans can be classed as either secured or unsecured. A secured loan is where an asset of value is used as security for the lending facility, where this could be a personal asset, such as residential property, or a business asset, such as commercial premises or land. In contrast, an unsecured loan refers to borrowing for which the business is not required to pledge any collateral to guarantee repayment of the lending facility.
When applying for a secured loan, lenders will not only look at the value of the asset, together with the age of the business and its annual turnover when assessing affordability, they will also usually consider any bad credit. Having an adverse credit history is not necessarily a bar to being approved for a secured business loan, as the risk to the lender is reduced by the security offered as collateral. However, it can be far more difficult to be approved for a business loan with a bad credit score and, even if you are approved, you may be offered a loan on less favourable terms, especially when it comes to interest rates.
There are several online eligibility checkers that can be used to conduct a soft credit check before applying for a secured loan, in this way you can gauge whether your application is likely to be successful without this adversely affecting your credit score.
Can you get an unsecured business loan for bad credit?
Unsecured loans, in contrast to secured loans, offer a number of benefits to business owners, including the fact that you do not need to have an asset of value to be approved for borrowing. This also means that you will not be at risk of losing a valuable asset if you default on repayment, where lenders can seize and sell assets used as security for a loan.
The process to apply for an unsecured loan is also typically far quicker than applying for a secured loan, as there is no need to provide proof of an asset in support of your application or for that asset to be valued. In many cases, the time between submitting an application and being approved for an unsecured loan can be a matter of minutes. You may also be granted access to the loan facility in a matter of hours or just a few short days.
However, having bad credit can make it extremely difficult to get an unsecured business loan from mainstream lenders, such as banks. In most cases you will be unlikely to qualify for an unsecured loan if you have a bad credit history as either an individual or a company, where lenders will usually undertake both a personal and business credit check.
What types of business loans for bad credit are available?
It is still possible to get a loan with a bad credit score, although you may need to be prepared to use an asset of value as security. However, there are a wide range of assets that can be used as collateral for a business loan. There are also various different finance options that may be available to you if your credit score is lower than you would like.
When it comes to secured loans, the types of assets that can be used as security could include property and land, including residential and commercial property, both freehold or leasehold. You could also use business equipment, plant, machinery or inventory, such as raw materials or finished goods. Additionally, with certain types of asset-based lending, the lender will accept accounts receivable as collateral, which refers to outstanding invoices raised by the business but not yet paid. For example, invoice discounting will allow you to finance your sales ledger and debtor book on an ongoing basis, releasing funds against unpaid invoices for customers who have received goods or services from you on credit.
Secured loans or other forms of asset-based lending are also popular options for startups or businesses with very little trading history where, again, any assets you use are a form of guarantee for the lender. The lender may still take a view on any bad credit history, where they may ask for a personal guarantee in addition to any security. Still, being prepared to pledge an asset as collateral will significantly increase your chances of being approved.
What can you do to improve a bad credit score?
In addition to considering finance options where the focus shifts away from credit scores, there are also ways to repair your bad credit and improve your rating to make it easier to obtain a loan. A combination of factors will affect your personal and business credit scores, where you will need to identify those factors that are bringing your score(s) down.
Credit reference agencies collect and maintain information on the financial behaviour of individuals and businesses in the UK, recording a number of different elements of your credit profile. These include your payment history, your total amount of debt, when you held credit and for how long, the type of finance you currently have and any applications for finance that you have made recently. Your business credit score will also take into account thinks like your trading history, the level of risk associated with your customer base and even your industry sector. All this information is compiled into two separate credit reports, where you and your business will be given a specific score based on the findings of those reports. You will also be given a rating, based on the bracket that your score falls into.
Each of the credit reference agencies may have slightly different credit report information for you, such that you may see different scores as a result. They also use slightly different credit scoring models, with different brackets. However, personal credit scores typically range from 300 to 850 where, within that range, scores can usually be placed into one of five categories: poor, fair, good, very good and excellent — where the higher the score, the better. In contrast, the scores for businesses may range from 1 to 100 although, as with a personal credit score, a lower score will represent a higher risk for lenders.
You can easily check you scores online, accessing both your full consumer and commercial credit report to see where any problem lies. These reports will provide a breakdown of how each credit score is calculated and what factors are affecting these. You will also usually be given tips and best practice advice on how to improve your credit score before applying for a business loan. In particular, you must ensure that you do not further default on paying any bills due, where paying on time will eventually dilute any previous history of late payments. As long as you commit to gradually improving your score by paying off outstanding debts and proving reliability, new lending opportunities will eventually open up to you. You must also avoid the temptation to apply for several lines of credit, especially if any application is currently unlikely to be approved because of bad credit.
Where can you find business loans for bad credit?
If you are a business owner with a poor credit rating or have not yet developed a good credit history, bad credit business loans can be secured from a range of specialist lenders. However, this may limit the amount of lending that you can be approved for, and you may have to pay higher interest rates than for other loan types, increasing the overall amount that you will have to pay back. You may also need to be prepared to offer security for the loan, either by way of an asset of value or by using a guarantor, where a number of lenders may consider third-party security, instead of or alongside any other security put forward.
By seeking advice from a financial expert, you can explore all options when it comes to financing or, alternatively, identify the best way to improve your credit rating over time.
Importantly, both personal and business credit scores are complex statistical models for predicting credit risk, where there is no guaranteed way to improve these scores. Where improvement can be made, it can also take several months for this to be recorded on your credit report(s) so, if finance is needed now, you should always seek the help of an expert.
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
