How to get a business loan with bad credit
If you or your business have a bad credit rating, you may still be able to get the funding you need to drive your company forward. Our guide to bad credit business loans explains how.
Key takeaways
Bad credit business loans are designed to help company owners with poor personal or business credit scores obtain essential business funding
Keep in mind that bad credit business loans can have lower limits and often come with higher interest rates
Loan providers assess various factors including affordability and credit scores before deciding whether to lend
There is no hiding that bad credit can have a negative impact when applying for business financing.
Some lenders may be wary about offering you a loan if you have glitches in your credit history, making it difficult to source the funding your organisation needs.
This is where bad credit business loans can help you get the financial help you require.
What are bad credit business loans?
Bad credit business loans are a type of loan that allows company owners with poor personal or business credit scores to obtain much-needed business funding.
Bear in mind that bad credit business loans tend to come with a higher interest rate, meaning that your cost of borrowing will be higher too.
A poor credit rating might also mean you’ll be more restricted in how much you can borrow, compared to the limit available if you have an excellent financial history.
What can I use bad credit business loans for?
You can use your bad credit business loan for any kind of business-related requirement or purchase.
For instance, you may decide to take it out to expand your company, pay employees’ salaries, buy new tools and equipment, or help with cashflow.
There is no real limit on what you can spend your bad credit business loan on, as long as it is used to cover company-related expenses only.
What are the advantages and disadvantages of bad credit business loans?
Bad credit business loans have benefits and drawbacks. Here are some of the most prominent pros and cons to take into account when making your choice:
Pros
Access to funding. Bad credit business loans allow companies with poor credit history to obtain the business financing they require.
Freedom to spend money on what you want. You can spend the loan on whatever business-related matter you wish.
Improve your credit score. As long as you keep up with repayments, a bad credit business loan can show your company can handle its finances responsibly. In turn this helps boost your credit score and can make it easier to get cheaper financing in the future.
Cons
Smaller loan amounts. Given that borrowers with poor credit scores are often deemed as high-risk, loans may be given out in smaller amounts.
Higher interest rates. Borrowers with bad credit are typically offered loans that come with higher interest rates, making them more expensive.
Less choice. There may be fewer borrowing options available to your company and you may have to turn to a specialist lender.
How can I get a business loan with bad credit?
Having a poor credit score can hinder your chances of getting the deal you’re hoping for, but there are steps you can take to help get your application approved.
Getting a business loan with bad credit
Start small
By applying for a smaller loan initially, you may have a higher chance of success. Bear in mind that shorter loan terms generally mean higher interest rates, so browse the market for more favourable options.
Consider a specialist lender
Specialist lenders are used to dealing with people with low credit scores, but they will still need to see that you’re able to repay your debt in the near future.
Offer security
You can put down an asset or have a guarantor who can cover your debt if you can’t. By providing security, you can mitigate some of the risks that a lender may not be ready to take.
Shop around
MoneySuperMarket can help you compare a wide range of business loans, allowing you to determine which deal would best suit you and your business.
What types of business loan can I get if I have bad credit?
There are numerous finance options available if you need a business loan but you have bad credit, each with their own merits. These include:
Types of business loans for bad credit
Unsecured business loan
Unsecured business loans do not require any form of collateral, such as property, vehicles or expensive equipment.
However, lenders will carry out extensive checks, exploring your business’s financial stability and credit history. A bad business credit rating may mean that you cannot get an unsecured business loan.
Secure business loan
Secured business loans use high value assets, such as property, to give lenders security if you cannot make repayments. This means the lender can seize assets if payments are missed. Because they are secure, it is easier to get a secured business loan with bad credit.
Business credit card
Business credit cards tend to come with lots of reward options, such as money off flights and hotels, as well as offering a more flexible way to manage repayments.
They may be an option, although if you have bad credit, you may be rejected, especially if you’ve been trading for less than a year.
It’s a good idea to do a soft search to see if you can be approved before making a full application. This way, if you do not get approved, this failure won’t show on any future credit report.
Merchant cash advance
A good choice for businesses which have previously been denied long term lines of credit, a merchant cash advance is a loan which is raised against future credit card sales.
The cash is paid quickly, making it ideal if your business has immediate cashflow issues or needs to pay a bill such as VAT on a short deadline.
What makes a merchant cash advance popular is the fact it has no APR, with the loan paid back as a percentage of credit card sales.
Why are credit scores important to lenders?
Loan providers want to make sure that you are a reliable borrower before they lend you money.
Credit scores act as an indicator. For example, if you have borrowed cash in the past and have repaid your debt in full, you’re likely to show a positive credit score.
In contrast, if you have a history of skipping repayments, this will be reflected in your credit score – and it won’t show up as an encouraging sign to lenders.
Ultimately, they want to make sure you’re able to afford what you owe them, and credit scores can be used as a helpful tool to figure out whether you are.
What is considered bad credit?
There are three main credit rating agencies – Experian, Equifax and TransUnion – and all use a slightly different scoring system. In all cases, the lower your number the worse your credit score.
What is considered a bad credit score also depends on the criteria of the loan provider, who will make their own assessment of who they are prepared to lend to and at what rate.
Our guide on What is a bad credit score? shows that 550 or under on the TransUnion system that MoneySuperMarket uses is a poor credit score. It’s important to remember that different systems are used and ultimately it does come down to the loan provider.
If you are worried that your business has bad credit, then there are ways to boost it.
First of all, make sure that you file full accounts to Companies House, rather than abbreviated ones. This will show lenders that you are open with how you run your business. It’s essential that you make payments on time, for all bills, as being late can negatively impact your business credit score.
Ensure that you have enough cash, either yours or an overdraft, to cover all bills, as this will show lenders that you have a good handle on your finances. It’s also a good idea to use your business bank account for all transactions, avoiding using any personal accounts to cover costs.
Most importantly, only apply for a loan when you absolutely have to. And when you do, get quotes rather than making full applications. If you apply and get turned down for multiple applications, then lenders will be reticent to give you a loan.
What factors could affect my business loan application?
There are numerous factors to consider when preparing your business loan application. These include:
Factors that affect your business loan application
Personal credit score
While your business may have a bad credit rating, lenders will also take into account whether you have a good personal credit score too. This is true for sole traders and directors of companies.
While a poor score may affect your ability to borrow, a good personal credit score paired with a bad business credit score can also spell trouble.
Lenders may believe that you may take out personal loans to prop up your business on top of a business loan. This can make your business look like a risky proposition.
Business financial history
If your business has a poor track record of paying off credit, then lenders will see that as a risk. Your financial history will be a major factor in any business loan application, so make sure you are as transparent as possible and explain any issues in detail to lenders.
Assets
If you have assets, then you may find you can get a secured business loan. This can be good if you have a poor credit score, as it shifts the risk from lender to your business, with any assets being used as collateral in the event of non payment.
How long you’ve been operating
If you have a long history as a business, lenders may look favourably on you when it comes to a business loan, as it suggests your business has enjoyed long term stability.
County Court Judgements
known as CCJs, such orders are taken out when you have previously failed to pay off a business loan. CCJs can make it a lot harder, although not impossible, to get a business loan.
How does my business qualify for bad credit business loans?
Businesses with poor credit scores will need to meet specific eligibility criteria to receive funding.
Usually, these criteria include:
Your business must be registered in the UK.
You will need to be able to prove that you’ve been trading for at least two years.
You need to show a solid growth plan (or offer personal or commercial assets as security).
No matter what type of business you run, whether it’s a start-up, a limited company, or a sole trader, this set of eligibility criteria tends to apply to all kinds of organisations.
Do lenders look at my personal or commercial credit score?
Lenders are likely to look at both your personal and commercial credit ratings, but which one plays a more significant role depends mostly on the type of business you own.
For example, if you’re a sole trader, you’re generally the only person responsible for the company. In this scenario, your personal credit score tends to be just as important as your commercial record.
If you share an organisation alongside a business partner, lenders will want to look at both owners’ credit files. This is because both are likely to be involved in business decisions, including how to manage the firm’s finances.
In the case of a limited company, lenders will want to have a close look at the business’ credit score and history. They may also check the records of any director and will also ask to view the credit files of anyone who signs a personal guarantee.
This is a legal agreement for which an individual promises to repay the loan with their own personal funds if the business fails to do so.
Can I get a business start-up loan with bad credit?
Start-up business loans may be more challenging to take out if you have a poor credit score. As you begin your trading journey, you may not have many assets to put down as security, meaning that lenders will see you as a high-risk borrower.
That said, it’s not impossible for new companies with poor credit to gain access to business funding. MoneySuperMarket can help by searching the market in search of the deal that best suits you and your business.
Personal Finance Expert
Our expert says...
“This guide highlights the importance of maintaining a strong credit history, both personally and corporately, if you’re looking to borrow for your business. Not only will it mean that you’ll be approved for a loan, but that you’ll be able to access the best rates too, keeping repayment rates down and making it cheaper in the long run.”
Other useful guides
We have a range of guides to help you learn more about business loans:
Compare business loans with MoneySuperMarket
Lenders offer a wide range of business loan options for you to choose from and the easiest way to compare all business loans available in one place is by using MoneySuperMarket.
To help you choose the best business loan for your needs, we’ve teamed up with Think Business Loans who sort through hundreds of loan providers, including high street banks, challenger banks and alternative lenders, to find you the right type of finance at the best rates.
It’s easy to get started. You’ll be asked a few straightforward questions about how much you’re looking to borrow and how your business will use the funds. You can manage your application online and, when approved, there’s a handy app to keep you on top of your payments.
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Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
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Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...
