A business low credit score rings alarm bells for most mainstream lenders as it raises you to a risky borrower profile. But having a lower credit profile doesn’t automatically close all loan doors. You’ll simply need to take a new approach with specialist lenders who assess applications with a bit more flexibility.
The downside to bad credit business loans is they come attached to higher interest rates, with figures sitting considerably above what you’d see with traditional financing. Not only that, but terms and amounts might not be as broad.
The good news is whether your business or personal credit history is poor, funding options do exist. From asset-backed secured loans to government grants, your choices extend further than most business owners realise. Let’s walk through how you can find business funding despite credit challenges..
Understand What Bad Credit Means for Your Business
Getting to grips with your credit status is essential before you start your search for business financing. You should not be blind about your financial standing before you start exploring.
What is a business credit score?
Your business credit score is simply a number that represents how creditworthy your company is and is often represented on a scale from 0 to 100, though can be in other formats depending on the agency providing the data. The higher you score, the less risk you propose to lenders. The number comes from several areas including:
- How promptly you pay suppliers and creditors
- Your company’s credit history and current debt levels
- Which industry your business operates in
Different credit reference agencies don’t quite see eye to eye on scoring systems. Generally though, anything above 80 puts you in the excellent category and if you’re below 40, you’re in high-risk territory and securing loans will be particularly tricky.
How personal credit affects business loans
For smaller businesses – especially those just starting out – your personal credit history often carries weight in loan applications. When your business hasn’t built up much credit history yet, lenders can take a good look at both your business credentials and the personal credit records of the directors.
Some small business loans come with personal guarantees attached. Which means directors become personally responsible if the business can’t repay what it owes. This creates a direct connection between your personal finances and business obligations, especially if you’re operating as a sole trader or non-limited partnership.
Poor personal credit doesn’t completely sink your chances, but it certainly makes things harder. You might still get approved, but often with reduced terms and higher interest rates. That said, some lenders are less bothered about personal credit scores than others, particularly if your business demonstrates it can handle credit responsibly.
Why lenders care about your credit history
Lenders dig into your credit history mainly to figure the level of risk you propose to them. Your payment track record gives them solid evidence of how reliably you meet your financial obligations. This information helps them work out:
- Whether they will lend to you.
- How much money they’re willing to lend you
- What interest rate to apply to your loan
- What sort of repayment terms to offer
Beyond just the numbers, your credit history offers insights into your overall financial management abilities. Lenders don’t just look at credit scores though, they also factor in market conditions in your industry and how your business is currently performing.
Understanding both your personal and business credit standing puts you in a much clearer position, you’ll have realistic expectations and be better prepared with your application.
Check and Improve Your Credit Before Applying
Getting your credit in order before approaching lenders can make a big difference to increase your chances of success. You can address issues such as errors and identify quick wins to boost your score.
How to check your business and personal credit scores
Checking your business credit score isn’t complicated. Using one of the main credit reference agencies, you’ll often be able to check your score for free either once or a few times. Check it’s not part of your banking app, as many offer this service built in. Since each agency calculates scores using their own methods, it’s smart to check with several to get the full picture of your credit standing.
If you run a limited company, you’ll need your company name and registration number and you must be a registered director to access your business credit report. Most agencies now offer alert services to let you know when something changes on your credit record if you sign up.
Fixing errors on your credit report
Pay close attention to the ‘key score factors’ section for errors, as sorting issues here often results in impactful score improvements. Found mistakes? You’ll need to contact both the credit bureau and the business that provided the incorrect information.
For each error you spot:
- Submit a dispute and include supporting documentation
- Always follow up and ensure the mistake is removed.
Credit bureaus generally have 30 days to investigate any disputes and should contact you to confirm it’s been resolved. Ensure you receive a free report so you can see what’s been fixed.
Quick ways to boost your credit rating
Try these practical steps for improving your score :
- File full accounts with Companies House rather than the abbreviated version
- Keep enough money in your business account to cover all upcoming payments
- Pay every bill on time as your payment history has a big impact on your credit score
- Be selective about credit applications – too many create multiple “footprints” that can harm your score
- Keep your business information updated with Companies House, suppliers and customers
Business owners might believe that bad credit automatically rules them out of the financing game. While more traditional lenders might only be interested in lending to excellent scored businesses, there are alternative lenders that often take a more pragmatic approach to credit history.
Can you still get a business loan with bad credit?
Yes, it is possible. Specialist lenders exist to work with businesses who do not hold a spotless credit history. These providers don’t just focus on credit scores when assessing your application, though the terms won’t be as favourable as those offered to businesses in the top credit bracket.
Types of loans available for bad credit
- Secured loans – Putting your business assets up as collateral boosts your approval
- Unsecured business loans – Still possible but expect higher interest rates and not for those with rock bottom scores
- Guarantor loans – Where someone trustworthy promises to repay if your business can’t manage it
- Startup loans – Government-backed options specifically for businesses under three years old
- Asset finance – to purchase equipment under hire purchase or lease. The equipment is the asset, and reduces the risk to the lender.
What lenders look for beyond credit score
Alternative lenders examine past your credit rating. They’ll often assess your business’s growth trajectory, cash flow patterns and future financial projections. Your payment history with existing creditors matters too, particularly any recent improvements in your repayment habits.
Your personal credit score might come under scrutiny, especially if it’s stronger than your business score. At the end of it all, lenders want evidence that – despite past hiccups – your business is viable and capable of meeting its repayment obligations.
Tips to increase your approval chances
You might find applying for smaller amounts improves your odds. If you have a bad credit score, only consider borrowing the bare minimum you need. Managing that loan properly will help improve your score.
Peer-to-peer lending platforms can connect you with investors who may be more open to funding businesses with credit challenges.
Don’t try to hide past financial challenges, be transparent about what went wrong and demonstrate how you’ve fixed the underlying problems.
Choosing the Right Loan Option for Your Situation
Picking financing options becomes more complicated when you’re dealing with credit challenges. How do you work out which type of loan you could be eligible for?
Firstly do not apply for loans unless you have a good chance of approval. Talk to the lender before you submit an application about their lending criteria.
The lower the score, certain types of loans will drop away from your choices. Unsecured loans are the first to go. With no security via an asset or guarantor, they are reserved for low risk customers.
Talking to a business loans specialist or broker can be helpful. They will have a range of loans to introduce you to, and will be able to tell you which ones are most likely to be successful if you applied. They will go through your needs and work out with you the best way forward.
When to consider a guarantor loan
Guarantor loans can be a clever option when:
- Your business has a modest income
- You don’t own property or have limited equity
- You’re just starting out as a young entrepreneur with your first venture
Your guarantor agrees to cover the repayments if your business can’t. They will likely need to own property with sufficient equity to satisfy the lender’s requirements.
Alternative funding:
Crowdfunding has exploded in popularity, with platforms like Crowdfunder and Crowd Cube connecting you directly with small investors.
The main types are:
- Debt crowdfunding (works like traditional loans)
- Equity crowdfunding (where investors receive shares in your business)
Your specific circumstances and requirements will ultimately guide which option fits your situation best. Remember, what works brilliantly for one business might be completely wrong for another, there’s no one-size-fits-all solution when it comes to business financing.
Conclusion
Bad credit profiles can still find loans for your business funding aspirations. Secured loans, guarantor arrangements, and government grants all provide practical pathways forward for those with credit challenges. Each comes with its own set of advantages that might align brilliantly with your specific circumstances. Exploring these alternatives could reveal the perfect funding solution your business has been searching for.
Credit scores aren’t set in stone. They evolve and improve over time. Taking positive steps today – making payments on schedule, ensuring your credit reports contain accurate information, and managing your credit responsibly – will gradually expand your future borrowing options.
If you are struggling with bad credit and the impact on your business is starting to be a real cause for concern, seek help from professional business lending advisors. You will need their expertise to help.
Remember many business loans are not regulated by the FCA. It’s your responsibility to ensure the loan is suitable, affordable and fit for purpose.
The funding route you choose must align with your business’s unique situation and genuine repayment capabilities. A loan with terms you can’t realistically meet will only create more problems down the road. Whether you ultimately go with asset-backed loans, find a trusted guarantor, or tap into alternative funding streams, there are lenders who focus on solutions for those with bad credit.