As well as your personal credit record, you’re probably aware that companies have credit files, too. So, how do you get the most competitive loan rate available to you if your business or personal credit record has taken a few knocks along the way?
Much like consumer lending, business lending is getting better at catering to “non-standard” (read “bad credit”) borrowers. In days gone by, if your bank said “no”, that might have been the end of the line. Thankfully, these days, there are plenty of innovative specialist lenders around. These lenders use smarter approval algorithms and underwriting processes, which let them access previously untapped sectors of the market without having to lend irresponsibly.
Whose credit record matters: my own or my company’s?
Both, but which is more significant can depend on the type of company the loan is for.
If you’re a sole trader. A sole trader and their business are one and the same legal entity. That means you won’t have a separate business credit record and lenders will use your personal credit score to determine your creditworthiness.
If it’s a partnership. Lenders will want to search the credit files of the partners (since they’ll be making the big decisions for the firm) and the business as a whole.
If it’s a limited company. Limited companies are separate legal entities, which means lenders will usually look at the company’s credit record first. However, they may also be interested in the credit records of the directors, particularly if there’s only 1 or 2, and definitely the credit record of any individual offering a personal guarantee. They may also use your personal credit record if your limited company is new and has yet to establish a business credit score.
Ultimately, each lender has its own approval systems and lending criteria, and they can even vary over time.
One lender might want you and your firm to tick all the boxes. Another lender might be happy to lend to somebody with bad personal credit if it can see that their company is clearly moving in the right direction, for example.
What is considered “bad credit”?
Individuals and companies don’t have one single, definitive credit score. Different credit reference agencies (CRAs) – the firms that track and report borrowing behaviours – use different scoring systems. However, if you have bad credit in one CRA’s eyes, there’s a strong likelihood you’ll have bad credit in all CRAs’ eyes.
“Bad” credit can come about through late repayments on credit agreements or simply through not having much of a track record of using credit products.
A credit score is just one of a number of factors that lenders look at when they’re weighing up whether or not to approve an application. In fact, what’s probably more important is how affordable the loan would be for your business, taking into account its past, present and projected income and outgoings.
With good credit, provided you meet their various criteria, most lenders will be happy to lend you money. With bad credit, some won’t.
Can I get a business loan with bad credit?
In a word, yes. However, having bad credit can make it harder to get a business loan and you’re likely to have fewer lenders to choose from.
Some specialist online lenders may be more willing to offer you a business loan if you have poor credit. However, you will usually find that interest rates are much higher and you might not be able to borrow as much compared to a business with good credit.
Secured business loans can be easier to get accepted for than unsecured loans. That’s because you’ll need to use an asset, such as property, as security, reducing the lender’s risk. But this also means that if you fail to repay your loan, your lender could repossess your asset to recover its funds. You should always consider this option with care.”
How can I get approved for a business loan with bad credit?
Here are some steps you could take to boost your chances of getting your application across the line:
Consider a specialist lender. Plenty of lenders aren’t looking for credit perfection, but they will need to see that your company is growing and can afford the loan.
Consider a loan matching service. A good loan matching service can check a large range of lenders in minutes and use soft searching (credit checks that don’t hurt your credit score) to only suggest those that you have a decent chance of success with.
Start small. The larger the loan, the more a lender has to lose. You might have to apply for a smaller loan than you’d ideally like.
Weigh up what loan term to apply for. The longer the loan term, the greater the window of opportunity for something to go wrong (at least, that’s how a lender might see it). However, shorter loan terms usually mean higher monthly instalments, potentially making your loan less affordable. Aim for the shortest loan possible that’s comfortably affordable.
Consider offering security. Using an asset (such as property) or a personal guarantee (where you become personally responsible for repaying the loan if your business can’t) as security can mitigate some of the risk for a lender.
Work on your credit file. Get visibility of your credit report, fix any mistakes it contains and work to improve your score by building up a history of using credit responsibly. You can do this by paying bills and filing company accounts on time, limiting credit applications, and asking suppliers to share payment record data with CRAs.
Bottom line
Whilst it may be more challenging for people with bad credit to get a business loan, it’s not impossible. It’s worth bearing in mind that some banks may ask for collateral or a personal guarantee, but make sure you understand exactly what you’re signing up to before agreeing to anything. Lenders will also likely charge you a higher interest rate on your borrowing.
Frequently asked questions
You can check your business credit score with any one of the UK’s main business CRAs. These are Experian, Equifax, Credit Passport, Creditsafe and Dun & Bradstreet. Many of them offer free trials, after which you’ll need to pay a subscription fee to access your business credit report. Find out more in our guide to business credit scores.
There are several different options to explore, including merchant cash advances, asset finance, business credit cards, peer-to-peer lending and government grants. Find out more in our guide to business loan alternatives.
This will depend on a combination of factors such as your annual turnover, the length of time you’ve been trading, and your cash flow and profitability. With an unsecured loan, you might be able to borrow between £5,000 and £50,000.
It could take longer to get a bad credit business loan due to the additional checks your lender might carry out. However, this will depend on the type of loan you’re applying for. Make sure you are as accurate and honest as possible on your application form to avoid unnecessary delays.
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To make sure you get accurate and helpful information, this guide has been reviewed by Rachel Wait, a member of Finder's Editorial Review Board.
Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
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