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Can you get a Business Loan with Bad Credit?

Having a lower credit rating can feel like you’re at a disadvantage when it comes to finding the right financial products and services for you and your business. Certain options can be blocked off to your business due to it having a credit score that lenders don’t feel comfortable with.

Businesses with lower credit scores should not be put off trying to find financial help, however. Bad credit business loans are designed so that the borrower and lender are both comfortable with the terms of financial arrangements being made.

If your business has a low credit rating, here we’ll explain what financial products you can get with bad credit and how bad credit business loans work.

 What does having bad credit mean for your business?

If your business has a bad credit rating, this typically means that banks and lenders aren’t confident in offering a full range of financial products to you. This can happen if your business has:

  • Previously missed payments on other financial products.
  • Missed payments on utility bills or contracts which have then been passed on to debt collection agencies.
  • Failed to make the proper repayments on any credit used.

When it comes to looking for business loans, lenders may be unwilling to offer you the best rates because they view your business as a risk.

If your business has fallen into debt before, you can seek advice on how to deal with business debt, put it into practice and try to improve your business credit score before applying for business loans. Even with a low business credit score, there are still products you can access when you need them.

Checking your business credit score

Monitoring the health of your business credit should be a part of your regular operations. It can give insight into how your business is perceived by lenders and help you in securing financing when needed in the future.

The most straightforward way to check your business credit score is to sign up to one of the three main agencies used in the UK: ExperianEquifax and TransUnion. Each agency uses different methods when calculating your business credit score.

What business loans can I get with bad credit?

There are traditional business loans which can be adapted for those with lower credit scores, helping you get access to the financial products you need.

Whether your requirements involve long-term financial solutions to support growth, or a start-up business loan for bad credit, these loans can sometimes present the right answer to your requirements.

Unsecured Business Loans

This type of business loan isn’t attached to specific assets or collateral. Getting approved for an unsecured business loan may rely more on your credit rating or be subject to affordability checks.

When lending unsecured business loans to companies with bad credit, traditional lenders will often require some stricter terms as a way of minimising risk on their side. These can include:

  • Limiting the amount of money that can be borrowed
  • Setting a higher interest rate
  • Require a shorter repayment period

If you are happy to agree to stricter terms, you can choose to go with a traditional lender for your business loan. Make sure you don’t overstretch your budget though, as failing to repay this business loan can do more damage to your business’ credit rating.

Secured business loans

These are loans that are tethered to business assets, such as equipment or property, as a means of providing additional security. By having your business loan amount measured against your assets, you can sometimes be approved for a larger sum as lenders are more confident they will get their money back.

This can be a useful option for those SMEs, as they may have sufficient assets to secure a decent-sized loan that can provide an adequate level of support.

While this form of business loan can make lenders feel more comfortable, it is always vital for borrowers to be fully aware that the items used as security can be seized if payments are not met.

Guarantor business loans

Some businesses may be able to secure additional financial backing by having another party co-sign a loan. By asking a guarantor to co-sign your business loan, they will enter a legally binding agreement with your lender. If your business fails to make the repayments, then your guarantor will be liable for repaying the loan until the account is settled.

Those looking for start-up business loans for bad credit can find that having a guarantor reassures lenders that they’ll be repaid. Discuss the details of your business loan with your intended guarantor in depth before having them co-sign.

How can I get a business loan with bad credit?

When you find yourself in a position where you need to consider business loans for bad credit, UK lenders will usually look at similar factors when going through the application process. Whether need assistance to make up for a shortfall or to assist with growth, lenders will want to feel confident that their loan will be repaid promptly.

How to qualify for a bad credit business loan

The first stage you need to clear is making sure you qualify for a business loan with bad credit by ticking off the criteria set out by a lender. The minimum requirements will typically include:

  • You are over 18 years old
  • You live in the UK
  • You have a UK-based business that has been fully trading for a certain period (different lenders can require different lengths of time)
  • The credit score of the business and the person applying for the business loan

Some lenders may include additional requirements, so it’s important to check the specific lender you’re pursuing before sending off an application.

Applying for a business loan with bad credit

If you meet all the requirements a lender has outlined, you can submit your application details for approval. How individual lenders decide who qualifies for their business loans varies quite a bit – it’s why some will reject an application from a business that others will offer a loan to.

There are a number of areas which lenders use to decide whether to approve a business loan. These cover the business, its performance, and who you are as an owner. Here are some of aspects of your business that lenders will likely review:

  • The owner’s experience as business director, both current and historic
  • The supply chain of your business, market segment, and customer reviews
  • The quality of assets possessed by the business, especially relevant for secured business loans

It’s worth noting that many lenders wouldn’t be comfortable with loans totalling more than a fifth (20%) of a business’ annual turnover.

Each lender put a different weight behind the individual criteria they look at, so it’s important to provide them with as much detail as possible. However, a bad credit score alone can be enough to dissuade many traditional lenders from approving your application.

“Some traditional lenders can throw up obstacles for those with bad credit ratings, as they don’t want to take the risk if you’ve missed repayments before. But alternative financing solutions can be an alternative if this is something you’re worried about – the application process can sometimes be quicker too.” – Chirag Shah, CEO of Nucleus 

Alternatives to business loans

If you feel that your business wouldn’t be suited to traditional options for business loans with bad credit, you can also look into alternative business finance solutions.

Lenders providing these alternatives will typically review more details of your business to ensure it’s suitable, meaning a bad credit rating can be offset by other factors. The following can be used by alternative finance providers:

  • Your business plan or strategy for the coming years
  • Total revenue
  • Profits earned over a certain period
  • Gross monthly sales
  • Growth potential based on sales projections

By looking at a wider set of criteria, alternative finance providers could decide that your ability to repay your loans is better than your credit score would imply.

This doesn’t mean that they would discount your credit score, but if your business is in a strong position, you may still be approved.

Alternative lending options for businesses with bad credit, as well as those with good credit who feel more suited to different choices, can be versatile and reliable options.

Friendly Loans

Start-up owners may sometimes prefer to secure finance for their business from their friends and family, as this can avoid heavy interest rates or the need for collateral if they default on the payments.

This is often a good option for SMEs with low credit as their credit score isn’t taken into consideration to acquire this type of loan. However, it can put a strain on relationships with loved ones if repayments repeatedly aren’t met.

Business Cash Advance

Business cash advances are an alternative finance solution which can be accessed by businesses that take payments in the form of card transactions. The amount of money that can be lent via business cash advance depends on the monthly volume of card payments.

The business receives a lump sum of cash and the finance provider receives a percentage share of the payments received by the business thereafter. Although the credit score of the owner will be taken into account, it isn’t the primary deciding factor and the advance is calculated based on future card volumes.

Invoice Finance

Businesses often run into a cash flow crisis due to the late payment of invoices. Such businesses can utilise Invoice Finance to give their cash flow a boost, using their invoices to gain access to money that is otherwise tied up in unpaid invoices.

Getting your business the right financial support

At Nucleus, we believe that by providing the right financial product to SMEs with a carefully considered business plan and potential can not only help them reach their goals, but surpass them and achieve targets beyond initial expectations.

If you’ve found a form of commercial finance with us which you think could benefit your business, fill out an application and we’ll be in touch. Alternatively, get in touch by phone on 020 7839 1980 or email [email protected] and we can arrange a consultation to find out how we can help your business get the financial support it needs.

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