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, if they just applied.
When you want to forge your business forward and poor credit gets in the way of your traditional finance and funding avenues 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 how 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?
The answer to this question comes in two ways; firstly, what type of bad credit does your company have, and; secondly, where can you go in search for finance?
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 point out these top 5 reasons (and what you can do about them):
- Missed/Late Payments on loans or credit cards
- 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 from a number of 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
- Current credit providers including credit cards, suppliers and bank account
- Payment performance.
The last reason is often one of the most damning; whilst CCJs 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 Poor 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.
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 increased credit limits with suppliers. This might include paying off credit cards, outstanding loan agreements, and paying supplier invoices on time.
If you can take the right steps to repairing your credit score prior to applying for a loan, then you are 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 that no longer apply. Either way, challenge anything that looks like it is working against you on your file.
Another way of boosting your credit score is looking for additional lines of credit you can use:
Trade Finance - Taking out a very short-term loan, 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 repayment history then credit cards can help you when you pay back on time month on month.
It can also make a difference whether poor credit is bad personal credit of 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 are a sole trader or director, or the only person in the business able to make (and support) financial decisions, then your personal credit will also be up for analysis.
Steps to Getting A Business Loan With Bad Credit
Step 1: Understand That Banks Have Unrealistic Credit Requirements
It isn't surprising when the 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: Realising That Alternative/Online Lenders Look At Current Performance
Poor credit affect 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 eight or so years, 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.
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 plays a part in your ongoing development and profitability.
Alternative lenders won't always place a huge amount of weight on historical poor credit history, so long as it is 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.
Step 4: What Security Can You Offer?
Many lenders require some kind of security before offering finance to businesses, and there are a number of creative ways of doing this. It means 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.
Invoice Finance - Factoring or invoice discounting are excellent ways of utilising a sales ledger in exchange for ready-access to income from unpaid invoices. Lender 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.
Unsecured Business Loan Options For Bad Credit
In many circumstances a business won't have any assets available, but you can still find an unsecured loan, even for those with bad credit 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 - principally 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 the 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.
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.
Bad Credit Loans - For businesses with bad credit scores, these loans are available when balance sheets and projections look good.
Business Cash Advance - As you earn money through sales, you pay back the advanced money that was leant to you. With this method you get an immediate boost of cash, but a percentage of future sales will be paid back on all transactions until the agreed amount is paid back.
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 that 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 f 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.
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 an unsecured business loan in the right places and taking steps to repair your credit score.