- May be an option if poor credit means you can’t get a standard business loan
- Specialist lenders are likely to offer a better chance of approval
- Interest rates are likely to be higher
Raising funding for your business can prove more challenging if your business has bad credit. In short, lenders dislike risk and credit lapses can raise alarm bells.
But while poor credit usually limits your options, business loans for those with bad credit history can still be found. There are things to consider, but in the right circumstances, these loans could provide the finance that your business needs.
What is a bad credit business loan?
Bad credit business loans provide a way for businesses to borrow if they have a poor credit history. Crucially, they should only really be explored as an option if adverse or bad credit is preventing your business from getting a standard business loan.
The funds raised through a bad credit loan can be used for a wide variety of purposes, and they tend to work similar to how business loans work generally.
However, an important difference is that bad credit business loans tend to have higher interest rates. This is a reflection of the extra risk lenders feel they are taking on by lending to those who’ve experienced credit problems in the past.
Can I get a business loan with bad credit?
It is possible to get a business loan with bad credit, but you will almost certainly find there are fewer lenders and loan options to choose from.
In particular, mainstream banks and building societies tend to be more reluctant to lend if poor credit is involved – though it could still be worth enquiring if your eligibility can be checked without it affecting your credit score.
Specialist bad credit business loan lenders can often offer a better chance of approval. This is because these lenders focus primarily on lending to businesses with poor credit.
How do you get a business loan with bad credit?
To improve your chances of getting a business loan with bad credit:
Provide security: It’s often easier to get a loan if you can offer an asset as security that the lender knows it can take if repayments are missed. A personal guarantee, meaning you’ll personally cover a loan if your business can’t, may offer similar reassurance.
Opt for a smaller loan: Your chances of getting approved may be better if you ask for a smaller loan, which limits the level of risk taken on by a lender.
Focus on your business’s finances: Consistent performance, cashflow and revenue can help convince lenders you’re in a good position to repay a loan. A strong business plan and forecasts are likely to help too.
Consider different lenders: Eligibility criteria differs between lenders, so explore as many options as possible. Business lenders that specialise in bad credit may offer the best chance of getting a loan.
Check your business’s credit history: Make sure your business’s credit score is as good as it can be. Paying down existing debts, making payments on time, and checking for errors in your credit history could all make a difference.
How can I improve my business’s credit score?
Improving the credit score of your business could widen your loan options and mean you can access better loan rates. To try to improve your business’s credit score:
- Check your business credit report for errors and ask for them to be removed.
- Pay existing loan or credit card arrangements and other bills on time.
- Borrow responsibly, and reduce your existing debt balances if you can.
- Avoid making multiple applications for credit.
- Register your business to increase its credibility.
- File full business accounts to demonstrate transparency about your business.
- Make sure all information on your files at HMRC and Companies House is up to date.
- Create separation from your personal finances by using business finance and opening a business bank account.
- Ask suppliers to share your payment record with credit reference agencies.
What types of business loans can you get with bad credit?
Secured business loans
Secured loans involve putting forward an asset that your business owns as collateral or security for the loan. While this puts the asset at risk, it can make lenders more willing to lend, as they have something to fall back on if repayments aren’t made. Assets typically used include business premises, equipment, or vehicles.
Unsecured business loans
By contrast, unsecured business loans don’t require any security, meaning business assets aren’t put directly at risk. However, with eligibility for an unsecured loan being mainly judged on your business’ finances and credit history, they are often harder to get with bad credit. Offering a personal guarantee may improve your chances.
Start up business loans
New or younger ventures may not have good credit simply because there’s little in the way of credit history for lenders to assess. For these reasons, it may be possible to get a start up business loan with bad credit, though security, a personal guarantee or a good credit score of your own may become more important.
Business credit cards
Bad credit may make it harder to get a business credit card but there could still be options available. Be aware that poor credit is likely to mean interest rates and costs are higher than on the best business credit cards on offer.
Merchant cash advances
With a merchant cash advance, funds are borrowed based on a business’s future sales, making its credit history less important. Repayments are usually taken automatically from a business’s debit and credit card sales income.
» MORE: Find business loans to suit you
Pros and cons of bad business credit loans
There are some potential benefits to taking out a bad credit business loan, but some important drawbacks to think about carefully about too.
| Advantages | Disadvantages |
| May allow businesses with poor credit to get funding | Interest rates are likely to be higher than on loans available with good credit |
| Keeping up with repayments could help improve your business credit score | Fewer lenders and loan options to choose from |
| Funds raised can usually be spent on whatever a business needs | You may need to provide a personal guarantee, and make repayments from your own funds if your business can’t |
Is a bad credit business loan a good idea?
Bad credit business loans should only really be considered an option if poor credit means you’re struggling to get a standard business loan.
This is mainly because bad credit business loans usually have higher interest rates than on loans available to businesses whose credit history is good.
Crucially, if the reason for having adverse or bad credit hasn’t been addressed, taking out a bad credit business loan may not be a good idea. In particular, if your business has escalating debts, very careful thought is needed before borrowing more.
» MORE: Best small business loans
Image source: Getty Images
About the Author
Dive even deeper
Short-Term Business Loans
Business Loan Calculator
by George Harrison
by Rhiannon Philps