For business owners with a poor credit history, securing a loan can feel challenging. However, there are still viable financing options available, even with a lower credit score. Whether you need funds for expansion, equipment, or covering cash flow gaps, understanding your options for loans with bad credit can open new opportunities. This article explains why your business may have a poor credit score, how it impacts borrowing, and how you can still obtain funding with a less-than-ideal credit history.
Why Your Business Might Have Bad Credit
A low credit score indicates to lenders that there may be a higher risk involved in lending to your business. Credit scores for businesses are usually determined based on your history of managing credit, including your repayment habits, credit usage, and financial performance. Here are common reasons a business might develop a low credit score:
- Missed or late payments on previous credit agreements.
- Defaults on a credit account, resulting in the lender closing it due to non-payment.
- Exceeded credit limits on business credit cards or lines of credit.
- County Court Judgments (CCJs) or bankruptcy filings against the business.
- Personal financial difficulties for key managers, such as debt management plans, which can also affect the business’s creditworthiness.
Each of these factors signals financial challenges, which can make lenders hesitant to provide a traditional business loan. However, understanding how credit impacts your loan application is essential to identifying alternative financing options.
How to Check Your Business Credit Score
Before applying for a loan, it’s beneficial to check your business credit score through one or more UK credit reference agencies, including Experian, Equifax, and TransUnion. These agencies provide access to your business credit report, giving insight into your creditworthiness and helping you spot any inaccuracies that might further harm your score. Reviewing your credit report helps you gauge which loan options may be feasible for your current financial situation.
Free and Paid Credit Report Options
- Experian’s My Business Profile offers a free trial, after which a monthly fee applies.
- Equifax provides a 30-day free trial with continued access at a monthly cost.
- Multi-Agency Reports (e.g., CheckMyFile) show insights from multiple credit agencies and offer free trials followed by subscription fees.
Knowing your credit score helps you prepare for loan applications and guides you toward suitable lending options for businesses with bad credit.
Loans for Businesses with Bad Credit
For businesses with poor credit scores, securing a loan from traditional banks can be challenging. Many high-street lenders impose stricter credit requirements, offering fewer options to businesses they perceive as higher risk. Fortunately, several types of loans specifically cater to businesses with bad credit:
- Bad Credit Business Loans
Specially designed for companies with low credit scores, these loans are offered by alternative lenders. They often have higher interest rates than standard loans to account for increased risk but remain a feasible option for businesses that need immediate funding. Comparing terms, fees, and interest rates across lenders is essential to ensure you choose the best available option. - Secured Loans
If your business owns assets like property, vehicles, or equipment, you may qualify for a secured loan. In this arrangement, your asset acts as collateral, reducing the lender’s risk and typically leading to lower interest rates than unsecured bad credit loans. However, if repayments are missed, the lender can seize the asset to recover the loan value. - Guarantor Loans
Some lenders may approve loans if a guarantor, such as a business partner or family member, agrees to cover the debt if the borrower defaults. Guarantor loans can be beneficial for accessing higher loan amounts with more favourable terms, even if your credit is low. - Merchant Cash Advances
If your business operates in retail or hospitality and processes card payments, a merchant cash advance may be an option. This type of funding allows you to borrow against future sales. The advance is repaid by automatically deducting a percentage from each card transaction, meaning repayments are closely tied to cash flow and can fluctuate based on sales performance. - Peer-to-Peer Lending
Peer-to-peer (P2P) lending platforms match businesses with investors willing to lend. P2P loans are available for businesses with varying credit scores, often with competitive rates compared to traditional lenders. However, as with any loan, make sure to assess the interest rate and fees. - Government Grants and Loans
Small businesses may be eligible for government grants, which do not require repayment. Various grants target businesses based on their location, industry, or specific project needs. Start-up loans, backed by the UK government, also offer an alternative if your business has no prior trading history but meets other eligibility criteria.
How to Get a Bad Credit Business Loan
Once you’ve chosen a suitable type of bad credit business loan, follow these steps to maximise your chances of approval and select the best loan for your situation:
- Research Loan Terms and Costs
Different lenders offer varying interest rates, terms, and fees. By comparing the Annual Percentage Rate (APR) and all associated costs, you can select a loan that aligns with your budget and repayment capacity. - Consult a Financial Advisor
A financial advisor or accountant can provide insight into how the loan’s costs and repayment obligations will impact your cash flow. Their guidance can help you make an informed decision and avoid loans that might strain your business financially. - Prepare Documentation
Be ready to present financial records, such as bank statements, revenue details, and profit forecasts. Some bad credit loans may also require a personal guarantee, especially if the business credit score is very low. - Check Credit Score Regularly
Applying for too many loans within a short period can negatively impact your credit score due to multiple hard credit checks. Avoid this by focusing on loan options that best suit your needs and consulting with a lender before formally applying.
Other Funding Options for Businesses with Bad Credit
If a bad credit loan is not feasible or appropriate, there are alternative financing options that may better fit your business:
- Business Credit Cards
Many banks offer business credit cards aimed at individuals with poor credit scores. Responsible use of these cards, such as paying off balances in full each month, can help gradually improve your credit rating over time. - Equity Crowdfunding
This method involves raising funds by selling shares of your business to investors in exchange for capital. Crowdfunding doesn’t involve repayment, but it does mean giving up partial ownership, which may appeal to early-stage businesses without a robust credit profile. - Invoice Finance
Businesses with unpaid invoices can use invoice finance to access funds. A lender advances a percentage of the invoice value, with repayment occurring once the customer settles the invoice. This arrangement offers steady cash flow without requiring traditional credit checks. - Trade Credit
Some suppliers provide trade credit, allowing you to buy goods and pay at a later date. Trade credit won’t provide cash, but it does free up funds for immediate business needs without affecting your credit score. - Alternative Lending Platforms
Online lenders and alternative finance platforms are often more flexible regarding credit scores, with many focusing on factors like business cash flow and potential rather than historical credit issues.
How to Improve Your Business Credit Score
Improving your credit score can lead to more favourable loan terms in the future. Here are steps you can take to boost your business credit score:
- Pay Bills on Time
Consistently paying bills, suppliers, and creditors on time demonstrates responsible financial management and positively impacts your credit rating. - Lower Credit Utilisation
Keep your credit usage below 25% of available credit to signal that your business isn’t overextended. - File Annual Reports and Accounts Promptly
Regularly submitting company accounts and reports is a mark of reliability that helps maintain a good credit profile. - Correct Errors on Credit Reports
Periodically check your credit report for any inaccuracies, such as incorrect addresses or details, and promptly dispute any mistakes. - Reduce Debt Gradually
Paying down outstanding balances improves your credit profile and can lead to better financing options over time.
Is a Bad Credit Business Loan Right for Your Business?
A bad credit business loan can provide critical funding when conventional lending isn’t accessible, but it’s essential to carefully consider the terms and associated costs. While interest rates may be higher, selecting the right loan product can help bridge funding gaps and sustain growth. However, if a bad credit loan doesn’t align with your budget, consider alternative funding options that might suit your needs without adding debt.