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Can I Get a Business Loan With Bad Credit?

Can I Get a Business Loan with Bad Credit

Getting a Business Loan When You Have Bad Credit

If you have previously been rejected for personal loans, or need to inject further cash into your business, you may have wondered how feasible getting a business loan is when you have bad credit.

The good news is, that if you’re in need of a business loan to provide additional funding for your business ventures, there are ways to do this.

Read on for tips on how to navigate getting a business loan with bad credit, from different types of loans and ways to rebuild your credit score.

How Your Credit Score Impacts Getting a Loan

Understanding Your Credit Score and Its Impact

Everyone has a credit score. It’s a number that gives lenders a snapshot of your ability to manage debt and make loan payments when taking on loans, but how does your credit score impact your ability to get a loan?

Ultimately, your credit score directly impacts how easy it is for you to get a business loan.

If your credit score is quite low, (below 620) then it indicates to lenders that you have poor credit history. Depending on the lender, this could automatically rule you out of their loan application process, or you may be able to proceed but with higher interest rates or stricter lending criteria as a consequence of the poor credit rating.

If your credit score is higher, then you will be much more likely to get approved, without needing to take on higher than average interest rates, stricter payment terms, or securing the loan against any assets that you have.

What Does A Credit Score Look Like?

Anyone can view their current credit score online. Simply request a credit report from websites like Experian or Equifax. You will be able to see your overall score and any information that has been used to generate the score.

If you spot any errors in the information used, such as bank accounts you know longer have, incorrect addresses or loan commitments, you can resolve this to improve your score.

The score itself will usually sit in the following ranges:

  • 800 + = Exceptions
  • 750-799 = Very Good
  • 700 – 749 = Good
  • 650 – 699 = fair
  • 620 or below is poor.

Loan Options to Look Into with Bad Credit

If you have a bad credit score, there are still funding options available to you including;

  • Secured Loans: This type of loan needs collateral put up against it such as property or other assets. This means that if you fail to make repayments, the lender could seize these items to repay what you owe.
  • Guarantor Loans: If you can find someone who will sign the loan agreement as a guarantor, this often means the lender is more likely to lend to you. Be aware that the guarantor is agreeing to pay the loan on your behalf if you default, so only do this if you are positive you make the repayments. Otherwise you could strain relationships.
  • Peer to Peer Loans – Borrowing from individual investors can be a great way to access business funding. Be aware that this route may bring higher interest rates than high street lenders. 
  • Business Credit Cards – If you only need short term finance or enough to make smaller purchases, then you may be able to get a business credit card. The benefit of this is that if you make the repayments on time, you will gradually improve your credit score.
  • Invoice Financing -You may be able to get cash advances on invoices that are outstanding then repay the amount after you have been paid by customers.
  • Equity Financing – If you’re able to sell some of the shares in your business in exchange for funding, you may access the cash you need. The downside is you will lose some control over your business.
  • Crowdfunding – Crowdfunding is a popular way of getting small contributions from large numbers of people. This tends to work best if you have a compelling business story rather than having just ran out of cash!
  • Grants – Take a look at Government and non-profit grants that you could be eligible for. These can take a while to process or apply for and competition may be high, so this route will need to be planned in advance rather than a last ditch attempt to raise the funds required.
  • Personal Loans – Just because you’re unable to get a business loan, you may be able to find a lender who is willing to lend to you personally. Rates will still be higher due to the poor credit score, but it could provide the funds you need
  • Family & Friends – If you have family or friends who know that you will be able to repay them in a timely manner, they may be willing to provide an informal loan. Regardless of how close you are, always put the loan agreement in writing and ensure both parties sign it.
  • Finance brokers are a great option if traditional lending routes aren’t looking viable. They will know the market well and be able to present the best options to you to try based on your specific circumstances and financial position.

Not being able to take out a business loan can be frustrating, but always weigh up the pros and cons of alternatives available before diving into other routes of borrowing.

Navigating the Approval Process with Bad Credit

If you have a weak credit rating, you should expect to have to put in extra effort to secure a business loan. The following points cover the additional steps you may need to face:

  • Have all financial documents ready to share. Include business accounts, income, expenditure and outstanding loans.
  • Make sure that you provide information that is 100% accurate. Don’t just estimate.
  • You always have a choice. So don’t forget to compare lenders, even if you have poor credit. You don’t need to accept the first offer that is made to you.
  • Always be upfront with the lender about your credit status. If there are anomalies on your file, let them know this and the reasons why.
  • Never sign any loan agreement without thoroughly reading it first. Be sure to understand the repayment terms, interest amounts and any security that is used against the loan.

Tips For Applying For A Business Loan

Regardless of whether you have bad credit or not, the following simple tips will help to put you in the strongest position possible for a smooth business loan application process.

When Applying for a Loan:

  • Make sure that you gather all relevant documents beforehand so they’re easier to refer to or send on if requested. Get things like payslips, income summaries, tax returns and business plans.
  • You will be asked to provide a reason for the loan. Be honest about what the loan is for in this section as it can cause issues further down the line if you are found to be using the money for reasons other than those stated on the application.
  • Be realistic about repayment terms. Don’t be tempted to try and go for a shorter repayment if it means you will struggle to meet the payments. You will be penalised more in fees for missing payment deadlines than if you had extended the overall repayment term.
  • If you are not going through traditional lending routes, consider having a lawyer review any documentation before signing it
  • Always read the fine print – don’t sign anything if you don’t understand it.
  • If meeting lenders in person, ensure you dress smartly and act professionally throughout

A strong business case is more likely to sway lenders towards loaning the amount you need even with poor credit. So ensure that you can clearly explain why you need the investment you are applying for and how it will impact your business.

Being able to demonstrate exactly how you will be able to make the repayments due is also an excellent way of showing that you are a reliable loan applicant. It can also help if you can explain the steps you are taking to improve your credit score already.

If you know that you’re in a position to be able to afford a business loan, despite what your credit score says, you could ask for testimonials or character references from suppliers or business contacts. Having a third party validation of your trustworthiness can provide an additional vote of confidence for lenders.

Improving Your Credit Score Over Time

We mentioned above that even if you are successful in getting a loan with poor credit, it always pays to take positive steps to improve your credit score.

There are plenty of very simple ways that this can be done, including:

  • Always pay bills on time
  • Limit new spending that you are unable to pay for in full at the time of purchase
  • Pay off any outstanding debts
  • Avoid making lots of applications for credit as each one will leave a dent on your credit score
  • Dispute and resolve any errors on your credit file

Lots of little steps add up when it comes to improving your credit score. So don’t give up, you will soon start to see improvements.

Key Stages Of Business Loan Approval

Business loan approval process

When you apply for a business loan, it’s good to know what to expect. Whilst each lender will have it’s own way of doing things, you can expect them to follow these general steps:

1. Initial Assessment:

Each lender you approach will assess your business’s financial health to establish how healthy it is financially. This will involve providing information about the revenue, personal and business credit and ability to make repayments.

Those with bad credit should expect this initial process to take longer with more scrutiny required.

2. Loan Application:

After the initial gathering of information, you will need to fill out the form for the loan application. This may be online or via paper form but expect to input lots of information about your business, the loan you require and personal contact information.

3. Credit Check:

The credit check is where lenders will learn about your past financial behaviour and gives an early indication of your ability to repay the loan or if you represent a risk to their funding.

4. Collateral Evaluation:

If you are applying for a secured loan, you will need to provide information on the assets/collateral that you’re securing the loan with. For example, if it’s your home that you’re securing the loan against, you will need to provide proof of ownership and current market value.

5. Loan Offer and Terms:

If the lender decides to approve the loan based on all the information you have supplied to them, you will be presented with a loan offer. You should read this carefully as it confirms the amount they are prepared to lend you along with the interest rate, repayment terms and additional fees that may be required.

6. Loan Agreement:

If you decide to accept the terms offered to you, you will formally enter into a loan agreement and will be bound by the T&Cs outlined. This is the point that the loan becomes legally binding so be absolutely sure you want to proceed before you sign.

7. Funding:

Upon signing the loan agreement, the lender will provide the funds within the timescales outlined in their agreement. Depending on the amount this could be the same day but usually within 3-5 business days. You may get a lump sum or smaller lines of credit that you can utilise as needed depending on the terms of your agreement.

Getting Help From the Experts

Business finances can feel overwhelming, particularly if you’re struggling with debts or need additional funding quickly whilst juggling a poor credit rating.

The good news is that there are plenty of people that can help you.

If you need additional support in the business loan application process, you can talk to financial advisors, citizen’s advice or local business support groups with experience in lending processes.

There are also small business mentoring services available from the Government that can support lending applications as well as accountants and local business owner groups. Learning from the experiences of others and taking advice from experts in this field can make a huge difference to the success of your business loan applications.

The Bottom Line

If you need to get a business loan but have bad credit, there are options available to you. Poor credit doesn’t completely ruin your chances of getting a business loan, but it is likely to make the process more difficult and time consuming.

To recap, you can get a business loan with bad credit but you may be subject to higher interest rates, stricter repayment terms, or need to explore different lending options away from high street lenders such as crowdfunding, guarantor loans, secured loans, or grants.

Seeking professional help when you’re struggling with business finance can feel like another expense, but it could end up saving you money in the long run. There is also plenty of free support available from local business groups, Government advice sites, and citizen’s advice.

No matter how bad your credit score currently is, you can take steps to improve it today and continuously build your score back up over time.

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