If you have a bad credit history then you might find it difficult to getting standard business loans. But this doesn't mean you shouldn't be able to get one. Get the right one and you can even start reversing your credit score.
Business loans with bad credit
Having a bad credit history is just another problem UK businesses have to face. Much like the economic crash in 2009 when banks virtually shut down their lending streams, bad credit is just another hurdle businesses can encounter.
The important thing to recognise, is that a hurdle is not a barrier, you can get over it and while it might not be through the assistance of the traditional lending industry, there are more options available from alternative finance providers that can overcome your bad credit and help you find a suitable loan.
Whether or not you should be looking to take out business loans is dictated entirely by whether your business needs it to either grow or survive and every business has a different set of criteria.
You can have bad credit by either having a poor previous record of dealing with your debt or by not having much of a credit history at all. Unfortunately the banks can take a short-sighted view on your application.
Traditional lenders will often view your business with a dogmatic credit scoring criteria that doesn't take into account your current and future financial performance or projections.
The good news is that alternative lenders will often look beyond the credit score and delve into your company performance, balance sheets, growth plans and your actual revenue.
The list of alternative lenders willing to fund businesses with bad credit is growing - mainly because of their more open-minded lending criteria. And while your rates won't always be as competitive as traditional lenders offer to companies with good credit, they might not be as high as you might expect.
What type of bad credit do you have?
There are many reasons why your business loan application is getting knocked back, which can make it difficult when you are trying to expand your business.
County Court Judgement (CCJ) - When you owe money to someone and fail to pay it, they can apply to the courts who will decide whether there is a debt to pay and if so raise a CCJ against you. Which you must then pay.
Late/non-payment of credit cards and loans - Missed card payments matter. While no-one will be knocking at your door, back at financial HQ your credit report will highlight these missed payments and the more you make the bigger the hit to your credit rating.
No trading history - When your business has little or no trading history, then the personal credit history of the owners and directors become even more important.
Making multiple applications for credit at once - If you are merely rate-shopping (looking for the best deal - like mortgages) then it won't affect your credit score. But for multiple credit-loan applications, any previous inquiries in the last 12 months are considered.
Late filing of accounts - Apart from the obligatory fines, late filing of your annual return can affect your credit rating.
High Levels of debt - Lenders take into consideration your outstanding debts, but it's more important to them how you manage to pay them off, not necessarily how much you have, unless it is secured to your assets.
Previous insolvency/bankruptcy - Bad debts like credit cards stay on your file for around six years, but insolvency will always show up. Any bankruptcy will stay linked to your account and lenders always take this into consideration when agreeing loans. Your business loan rate might be affected by this.
Poor credit score - Your credit score matters to lenders. It contains public and private information which lenders use to help them make credit decisions.
Why your credit score matters
Everyone should take time to manage their credit score or at least be aware of how it can impact on your business' ability to gain funding. This is because whatever your credit history, it guides lenders of your future ability to pay back loans.
There isn't a definitive score that makes your business' credit score a poor one, but there are plenty of factors that contribute to it, especially if your business has any of the types of bad credit listed above.
Your credit score is a three-digit number and is calculated from your credit report. It is based on the following:
- Number of accounts you have
- Type of accounts
- Your available credit
- Length of credit history
- Payment history.
Payment history makes up to 35% of your credit score and it can become a significant factor in your future credit applications as this graph demonstrates.
How alternative lenders are credit scoring differently
A bad credit score can put off a traditional lender but even without a perfect credit score many alternative lenders put a greater emphasis on matters that directly affect your ability to pay them back, not what your total score might be.
Many alternative finance companies recognise that your credit score is just one way in which to assess how worthy you are of receiving a business loan and can be more objective than the reality of a business loan proposal.
- Your business plan/strategy
- Gross monthly sales
- Profit margins
- Capacity to grow
- Total revenue.
Increasingly alternative lenders have been leading the way in using technology to assess creditworthiness; looking at credit card transactions, social media influence, telephone usage, communication history with lenders, and the business' underlying strategy.
Loan options for businesses with bad credit
Having bad credit can limit your ability to gain business loans from the high street banks, but now more than ever there is a wide choice available for businesses looking for loans.
The alternative finance industry is growing at a much sharper rate than the high street banks and it isn't just because of the number of businesses with bad credit applying, it's also businesses with good credit taking advantage of the finance solutions available.
Unsecured business loan - You borrow a fixed lump sum and agree to pay it back over an agreed period. It isn't secured against any stock, building or asset you may have. Many unsecured loans are taken out by companies that cannot get a traditional loan from the bank.
Bad credit loans - Many lenders are now offering this as a specific category. For businesses with poor or less than perfect credit scores - alongside the more pragmatic form of credit scoring, preferred by alternative lenders - loans are available for exactly those sort of companies that don't have a great credit score but do have a good balance sheet.
Other lending options for bad credit
Friendly loans - Half of all new startups get funding from friends and family, even Richard Branson borrowed from the Bank of Mum when he started Virgin Records. You will undoubtedly have friends and relatives who will have reason to believe in you more than the banks do.
Grants - There are many government grants available to businesses to help them survive and grow. Having a business succeed is far more beneficial to the UK economy that letting it fail. So look for available grants.
Business Cash Advance - An option you can use that repays your loan at the same rate as money comes into the business through sales. You get an advance of cash and the lender gets a percentage of future sales transactions.
Asset Finance - For a business with plenty of assets like machinery, technology, vehicles or equipment, asset-based finance offers a cash injection with a much lower level of risk, as the security is built into the lending.
Invoice Finance - Whether this is factoring or invoice discounting if you a healthy sales ledger you can access money due to you immediately without needing to wait for a loan decision to be made.
Crowdsourcing - Offering up your product or your business to angel investors isn't just for shiny new tech firms. Individual investors can be attracted to your pitch and can help you stand taller and stronger than your competitors. Just be wary of how much of your business you might be giving away though.
What you can do to help your bad credit
The best thing you can do is prepare a detailed business plan. This will help you in any loan application and potential discussions with investors. It will certainly make it clear where and when you will be needing investment.
Ongoing strategies to improve your credit score might be nailed down to three things you can put into practise straight away:
- Take appropriate steps to repair your credit score prior to applying for a loan. Use credit cards sensibly or negotiate with existing lenders, like settling outstanding amounts for a discount or by removing negative marks against your credit.
- Challenge anything the looks like an error on your credit file. You can request your file from agencies like Experian or Equifax.
- Talk to an independent financial advisor and discuss what you need a loan for which can help you look objectively at your business and analyse the benefits for doing so.
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. Bad credit can be turned around simply by applying for a business loan in the right places and taking steps to repair your credit score.
Look at what is making your credit bad and approach lenders fully armed with your financial strategy. You might be surprised how reasonable the rates are in the alternative lending market on your next business loan.