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Can I get a business loan with bad credit?

Getting a business loan with bad credit?

You could still get a business loan if you have bad credit.

Whether you're starting out with a new business or looking to increase the size of it, you will often need access to credit to increase your chances of success.

If you’ve had financial difficulty in the past, or you’re a newcomer to credit and have no history at all, your options could be more limited.

Money Guru is here to explain how you can overcome a poor credit history and the types of credit available to business owners.

Types of business loans

There are many different types of credit available to business owners, some of which are more accessible to those with a problematic credit score than others.

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The main types of business credit are:

Term loan
This is the most recognisable type of loan. It involves borrowing a lump sum of money and paying it back over time, with interest. This may be tricky to get with a poor credit score but is the most similar to other none business loans.

Short-term loan
This type of loan is usually offered by alternative or niche lenders. It involves borrowing a lump sum, normally smaller than that of a term loan. This amount is then paid back over 3-18 months. This could be more accessible to those with a poor credit score.

Start-up loans
This is a government funded form of loan to help small business owners get up and running. You could borrow £500 to £25,000 and successful applicants will also get 12 months free mentoring. There is a fixed interest rate of 6% and you can repay the loan in 1 to 5 years.

Business lines of credit
This is offered by both banks and alternative lenders. It is a type of revolving credit which can be accessed by the user as and when they need it. It's a good option for unexpected costs but may not be accessible to those with a poor credit score.

Equipment financing
This is a great option for those with a poor credit score who are trying to get started in their small business. This offers business owners the opportunity to get the equipment they need to start their business and pay the amount over a period of time. As the equipment acts as collateral, this loan is more accessible.

Invoice financing
Another option for those with a poor credit rating, this is more appropriate for those who already have a business but would like to expand. Business owners can borrow up to 85% of the amount they have in invoices.

Merchant cash advances
This is a good opportunity for those with a poor credit history, but it can be expensive. Merchant capitalist companies advance the business fast cash that will be paid back with a part of the businesses daily debit and credit sales.

Business credit card
Although not technically a loan, this can be a great resource to make use of. When separating personal and business finances, a business credit card can help to build a credit score for the business.

Do I need good credit to get a business loan?

You don’t need good credit to get a business loan. Just like with a personal loan, a credit score will tell the lender whether you are a safe investment and likely to pay back on time and in full.

However, a poor credit record won't make it impossible to get credit – unless, perhaps you have recently gone through bankruptcy, or have a County Court Judgement (CCJ).

Lenders will take into account a number of things in order to make their decision. If they don’t have enough information on your company, they may look at your personal credit history.

You could choose to take time improving your credit score with something like a credit building credit card, before trying to get a business loan.

It really depends how quickly you need credit. If you can wait while you rebuild your credit score that could be an option. But, if getting credit is crucial for your business it might be better to look at loans that have a higher interest rate but lower repayments, to guarantee the financial stability of your business.

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Preparing for a business loan application

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A good place to start preparing for your application is to check your credit score.

This will benefit you in two ways. First, you can check for any inaccuracies that might be negatively impacting your score and make changes to this. Secondly, you can check your credit score without taking the risk of a failed attempt to get credit appearing on your credit report. This isn’t the only thing that determines your credit worthiness, but it’s a good place to begin. Lenders will check your income and expenditure to make sure that you can actually afford to make repayments.

Multiple failed attempts to get credit will put off potential lenders. This is because every time you make an application, it’s recorded on your file. Lots of applications in quick succession creates the impression that you are desperate for funds. Furthermore, any indication of being desperate points to a financially unstable borrower. Any lender looking at your credit history can see all applications made in the past and this will be part of their decision-making process.

Next, have your business plan at the ready. Some loan providers will prefer a steady history, but for some simply having a strong business plan will provide them with enough evidence to take a risk and lend you the funds you need.

Whatever stage of your business you're at, remember to take your time considering your options. And if there is the opportunity to improve your credit score, then take it.

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