Setting up a business with a bad credit history – the potential impact of CCJ’s, IVA’s or bankruptcy on your entrepreneurial vision.
From redundancy to bad luck, bereavement to depression, there can be a myriad of factors behind a less than satisfactory credit history. But, if you’re thinking of setting up a business you should consider the effect that your financial past is likely to have on your future plans. From CCJ’s right through to bankruptcy, bad debt will almost certainly have an impact on your entrepreneurial vision, especially when it comes to raising capital. But bad credit shouldn’t have to curtail your vision – in fact it’s proven that businesses set up by former bankrupts grow more quickly than any others, possibly through a greater determination to succeed.
If you have actually been the subject of a bankruptcy, then you need to make sure you stay within the law if you are setting up a new business. An undischarged bankrupt cannot be a company director, and cannot create, manage or promote a limited company without prior permission. If your bankruptcy is undischarged, there is nothing to stop you from trading as a sole trader, though you usually need to trade under your own given name. Once discharged from bankruptcy, there are no restrictions on setting up a limited company or serving as a director unless you have received a separate disqualification order.
Often, people will opt for an Individual Voluntary Arrangement (IVA) to deal with financial strain, which means that a formal arrangement has been set up with creditors to pay a reasonable amount each month. While an IVA will have a serious impact on your credit rating, it doesn’t legally prevent you from setting up a limited company or becoming, or remaining, a director.
At the lesser end of the scale of bad credit are CCJ’s (County Court Judgement), which will remain on your credit file for seven years. While these in no way impact on your legal right to be a company director or to form a limited company, they are likely to cause the same hurdles that an IVA or a discharged bankruptcy would when it comes to arranging business finance for you or your venture.
One of the first stages of setting up a company, is opening a business bank account and it is in fact a legal requirement if your company is limited. Almost all business accounts from the high street banks are credit checked and any kind of adverse credit, from CCJ’s to a previous bankruptcy could lead to a refusal. If you know you have a bad credit history, it’s worth looking for a specialist account from the outset to prevent multiple rejections. A handful of high-street banks, including Santander and Natwest do offer specific business accounts for those with bad credit but they are not advertised on their websites like their mainstream accounts. It’s worth drawing up a good, watertight business plan and enquiring in branch about these products and it goes without saying that they will be on a credit-only basis, at least until you have a proven trading history.
If getting a basic business account is a challenge, raising start-up capital with bad credit can be seriously tricky. Realistically, most businesses need some sort of cash injection to get started, often in the form of an unsecured small business loan, and your business is more likely to thrive with that cash boost from the outset. Unfortunately CCJ’s, IVA’s and bankruptcies, even discharged ones, are unlikely to endear you to mainstream lenders for UK business loans.
There are several options for raising business finance for you in these circumstances and you should consider the pros and cons of each one carefully.
A guarantee, either from someone involved with the business, or another company or individual might encourage lenders to take a chance on otherwise unsecured business loans. This option should always be considered carefully though, especially for the guarantor – with half of businesses folding within the first five years, it’s a gamble with not especially favourable odds!
If your business is especially unique or interesting, you could consider crowdfunding to raise start-up capital. There are a plethora of crowdfunding sites springing up, such as CrowdCube and Seedrs. The key is to capture the imagination of would-be investors, presenting your business in an interesting and potentially profitable light.
Government backed small business loans may also provide an alternative form of financing a start-up, as many are specifically targeted towards people who have been turned down by mainstream lenders. The downside with some of these schemes is that the application process can be convoluted, and you often have to match the money you are applying for with your own funds so you might need to have a hefty stash of start-up capital from the off-set.
If none of these options seem particularly viable, then you should be looking to a specialist business finance provider like Access Finance. We excel at providing or finding finance for businesses with an interesting story, especially if your venture holds great promise but is being held back by your past. As both brokers, with over 80 lenders on our panel, and lenders ourselves, we are particularly good at identifying sub-prime finance and products that other finance companies might not have access to. To have a chat about your circumstances, the plans you have for your business, and the right business finance for you to implement those plans call us today 03330 069141.