Some businesses don’t even bother applying for finance when they have bad credit, unaware that they might actually be able to get an unsecured business loan despite poor credit history.
When you want to forge your business forward and poor credit gets in the way of your traditional finance and funding avenues, often referred to as mainstream lenders such as traditional banks or financial institutions, then it can be an incredibly frustrating time for business owners. But more often than not, what many business owners fail to realise is that there’s always somewhere to turn.
So, is it possible to get an unsecured business loan with bad credit and how can you get a business loan when there seemingly isn’t anywhere to go?
In this article, we’ll explore:
- Whether it’s actually possible to get a business loan with bad credit, and why mainstream banks usually say no
- Which lenders look beyond credit scores, focusing instead on current performance, cash flow and real-world trading
- The practical routes to funding when credit is poor, including unsecured loans, alternative finance and creative security options
What Type of Bad Credit Does Your Business Have?
There are a number of factors that might be contributing to your bad business credit score. Experian points out the reasons (and what you can do about them):
- Missed loan payments
- Late credit card payments
- CCJs (county court judgements)/Insolvency/Bankruptcy
- Late filing of accounts
- High levels of debt
- Making multiple applications for credit simultaneously.
You’ll also need to know what information actually makes up your credit score so you can understand how your business can deal with poor credit and move forward to search for and secure business loans.
Your credit score is made up of several financial indicators, making up your score out of 100 (0 is a total risk and 100 is very safe):
- Public data from Companies House
- Information from court records, e.g. CCJs (county court judgements)
- Current credit providers, including credit cards, suppliers and bank accounts
- Payment performance
The last reason is often one of the most damning; whilst CCJs (county court judgements) can often be completely out of the hands of businesses and are often a willing result of temporary or poor trading conditions, having a continual and persistent record of poor payment to suppliers can often reveal a lot more about the health and attitude of a business to debt repayments.
How To Improve Your Bad Business Credit
One option, if you have the time and the patience, might be to undertake a plan to overcome your bad debt and improve your credit score by building back your credit rating. Maintaining a strong business credit profile is essential, as it can help you secure better borrowing options in the future.
A good start is making the effort to redress all the areas of your credit that adversely affect your ability to apply for finance or increase credit limits with suppliers. This might include paying off credit cards, outstanding loan agreements and paying supplier invoices on time. Before applying for finance, it’s recommended to check your credit score with all three credit reference agencies, as each may hold different information that could impact your application.
If you can take the right steps to repair your credit score prior to applying for a loan, then you’re going to improve your chances of being accepted for a business loan.
Where possible, negotiate with existing lenders and settle outstanding amounts (maybe they’ll accept a discounted lump sum settlement?). You can also remove any negative marks on your credit file that no longer apply. Either way, challenge anything that looks like it is working against you on your file.
Another way to boost your credit score ito lookng for additional lines of credit you can use:
Trade Finance – Taking out a very short-term loan, like 15-30 days, can be an answer to accessing immediate cash, but it also serves to improve your payment and borrowing record, so long as you maintain payments.
Business Credit Card – Credit cards can be dangerous, whether personal or business, but don’t be quick to dismiss them. If you need to improve your repayment history, then credit cards can help you when you pay back on time month by month.
It can also make a difference whether poor credit is bad personal credit or bad business credit. When you apply for finance, lenders will be looking at your credit report to see what kind of borrower you are likely to be. If you’re a sole trader or director, lenders will review your personal credit score as part of their assessment, as well as your business credit profile if applicable.
Steps to Getting A Business Loan With Bad Credit
Securing a business loan can be challenging if you have a poor credit history, but it’s not impossible. Many lenders now offer solutions specifically designed for businesses with bad credit, and the application process for these loans often differs from traditional loans. Understanding the steps involved and what lenders look for can help you improve your chances of approval.
Step 1: Understand That Banks Have Unrealistic Credit Requirements
It’s often not surprising when banks say no. They have very high bars and their funding decisions are made with one arm tied behind their backs, often self-induced. So for normal businesses, this means getting more creative and looking further afield than the high street, i.e., online.
Step 2: Realise That Alternative/Online Lenders Look At Current Performance
Poor credit affects the chances of achieving finance from traditional lenders, but your search shouldn’t stop there. Just having poor credit isn’t always enough to shift the goalposts too far; besides, the game hasn’t changed. You still have the ball and there are plenty of options still open for you to explore.
Over the last decade, there has been an explosion of alternative lenders, filling the gap in the lending market, willingly vacated by the high street banks. Increasingly more lenders are willing to provide finance options for businesses with bad credit, so finance applications have become less of a monkey on your back and more a key to unlock cash flow. Many alternative lenders may use a soft credit check, which doesn’t impact your credit score, or offer credit check business loans that are more accessible to businesses with poor credit.
Step 3: Find A Lender That Will Listen To Your Story
Traditional lenders have always viewed credit applications as historical certainties, either black or white. There are no shades of grey. Alternative lenders are forward-looking; what can your business do now and in the future? Alternative lending is about listening to your story and seeing how it plays a part in your ongoing development and profitability.
Alternative lenders won’t always place a huge amount of weight on poor credit history, so long as it’s historical and not current. Yes, they will look at your financial information (often thoroughly), but that’s a good thing because they might be able to recognise the positive aspects to it; monthly turnover, cash flow, creditors, debtors, order books, forecasts, monthly sales, customer reviews and industry reputation. They may also have different eligibility criteria, which can include reviewing your business plans to assess your growth potential and operational confidence.
Step 4: Figure Out What Security You Can Offer
Many lenders require some kind of security before offering finance to businesses, and there are several creative ways of doing this. These options are forms of secure finance, meaning businesses get more tailored solutions that fit in with their business model and forecast:
Asset Finance – When a business is asset-rich but cash-poor, a lender might be willing to take other forms of security like equipment or vehicles in return for more competitive loan rates. Secured loans and secured business loans use business assets such as equipment or property as collateral, which can help secure finance and improve approval chances, especially for businesses with bad credit.
Invoice Finance – Factoring or invoice discounting are excellent ways of utilising a sales ledger in exchange for ready-access to income from unpaid invoices. Lenders often look beyond financial or poor credit issues so long as a business is currently being run capably.
Turnover Loan – With a strong credit score and a business turnover appearing healthy and sustainable, a business loan might be willingly offered, despite bad credit.
Guarantor loans are another option for businesses with bad credit, where a director or third party provides additional security to help secure funding.
Personal Guarantees and Guarantors: What You Need to Know
When you’re applying for a business loan with a poor credit score or a history of bad credit, lenders often look for extra reassurance that their money will be repaid. This is where personal guarantees and guarantors come into play.
A personal guarantee is a legal commitment made by a business owner or director, agreeing to be personally liable for the business loan if the company cannot meet its repayments. In other words, if your business struggles to repay the loan, the lender can pursue your personal assets to recover the debt. This added security makes lenders more willing to offer business loans to businesses with bad credit, as it reduces their risk, even if your business credit score or credit history isn’t perfect.
For businesses with bad credit or a poor credit score, providing a personal guarantee can be the key to unlocking finance that might otherwise be out of reach. It shows lenders you’re confident in your business and willing to stand behind it, which can tip the scales in your favour when your credit score alone might not be enough.
However, it’s important to understand the risks. By signing a personal guarantee, you’re putting your own finances on the line. If your business can’t repay the loan, you could be personally responsible for the outstanding amount. This is a serious commitment, so always consider your ability to repay and seek professional advice if you’re unsure.
In summary, personal guarantees can help businesses with bad credit secure the funding they need, but they also mean taking on personal responsibility for the debt. Make sure you weigh up the benefits and risks before agreeing to become personally liable for your business’s borrowing.
Unsecured Business Loan Options For Bad Credit
Small business owners with bad credit, a low credit score, or an adverse credit history still have multiple options for accessing business finance. In many circumstances, a business won’t have any assets available, but you can still find an unsecured loan, even for those with a poor credit rating affecting your company or you personally, if you are willing to accept higher interest rates for doing so.
The number of alternative lenders offering to fund businesses with bad credit is growing, mainly due to their more open-minded lending criteria. And yes, interest rates won’t always be as competitive when compared to traditional lenders, but often they aren’t that far behind.
Alternative finance companies like Access Commercial Finance are growing at steeper rates than traditional banks (who are now increasingly pursuing similar financial models), and taking advantage of the lending options available might be a viable solution to your cash flow difficulties. Before applying, consider how much capital you need to start or grow your business.
Unsecured Business Loan – A fixed lump sum which a business agrees to pay back over a set period of time. As the name implies, it isn’t secured against any assets or stock. They often carry higher interest rates, but this is usually mitigated by shorter loan periods.
Merchant Cash Advance – A lump sum provided to your business, repaid from a percentage of future credit and debit card sales. This option is suitable for businesses with poor or no credit history, and repayments are directly tied to your revenue.
Loans for Bad Credit – These are available from alternative lenders for businesses with adverse credit history. Lenders assess applications based on broader factors like business performance and growth potential, not just credit score.
Bad Credit Business Loan – A specialised loan for businesses with poor credit scores, often with higher interest rates and specific eligibility criteria.
Business Loans for Bad – Tailored for businesses with bad credit, these loans may offer flexible terms and are accessible from non-traditional lenders.
Small Business Loans – Available for small businesses with poor or limited credit history, these loans include options like bad credit business loans and no credit check business loans, tailored to the unique needs of small businesses.
Start Up Loan – An option for new businesses without trading history, subject to a credit check. Start Up Loans can help get your business off the ground when other options are limited.
Business Grants – Government grants are also available to businesses to help them survive and grow. Having a business succeed is far more beneficial to the UK economy than letting it fail. So look for available grants.
Crowdsourcing – Individual investors might be attracted by your business performance (or pitch) and their investment can help you thrive in your market. However, you will be giving away a percentage of your company and they will be looking to generate a profit from it one way or another.
Friends & Family Loans – Nearly half of all start-ups use loans from friends and family. This has been true since entrepreneurs started entrepreneur-ing. Friends and family are the key allies believing in you, and their value shouldn’t be overlooked. However, it’s important to carefully manage your personal finances when using personal connections for business funding.
The cost of your finance will always be based on your credit score, but it doesn’t need to dictate whether or not you can get a business loan. When considering any loan, calculate the total interest to understand the overall cost of the loan. Bad credit can be turned around simply by applying for an unsecured business loan in the right places and taking steps to repair your credit score. These options can help secure funding and improve access to business finance for businesses with bad credit.
Secure an Unsecured Business Loan Today
Need help finding an unsecured business loan? Explore our tailored unsecured loan solutions at Funding Guru or get in touch with our experts if you have any questions.
FAQs on How to Get an Unsecured Loan with Bad Credit
Can I get a business loan with bad credit?
Yes, it is possible to get a business loan with bad credit, though your options may be more limited and interest rates may be higher. Lenders will assess your business’s overall financial health, cash flow, and ability to repay. Some lenders specialise in working with businesses with poor credit histories.
What should I consider before accepting a business loan with bad credit?
Before accepting any loan, it’s crucial to carefully review the credit agreement. This document outlines the terms, repayment obligations, interest rates, and any potential fees. Understanding the credit agreement helps you know exactly what you are committing to and ensures there are no surprises later.
Will a business loan affect my credit score?
Yes, taking out a business loan can impact your credit score, especially if you miss repayments or default. Responsible borrowing and timely repayments can help improve your credit profile over time.
Are there alternatives to traditional business loans for bad credit?
Yes, options such as invoice finance, asset finance, and government grants may be available to businesses with bad credit. These alternatives can provide funding without relying solely on your credit score.
