The right business loan can give your firm a boost, but how do you get one if you have a bad credit score? This guide explains your options.
Getting a business loan if you have a bad credit rating isn’t easy, but it’s not impossible. This guide explains why a poor credit score doesn’t have to be a barrier, and how you can find a suitable loan.
Setting up and running a small business is a challenge. Fortunately, there are plenty of lenders willing to offer loans even if you’ve got a tarnished credit report. This guide explores the factors that can cause a bad credit report, and what you can do to get a business loan even if your credit rating is poor.
A business credit score reflects how well a company manages its financial obligations, such as repaying debts and paying suppliers on time. A strong score reassures lenders and partners that your company is financially reliable, while a weaker score may suggest higher risk, whether due to missed payments, high borrowing, or a limited credit history.
Each of the three credit reference agencies — Experian, Equifax and TransUnion — generates a credit report for businesses, which includes a credit score. For example, Experian rates businesses out of 100, with 40 and below representing a high risk (poor score), 40 to 80 a medium risk (average score), and 80 or above a low risk (good score).
If you’re just setting up, or have only recently established your first business, you won’t have a good business credit score. This is because it takes time to build up a credit report.
Your business credit report and score reflect how well you’ve managed your company’s financial obligations. A strong score can unlock better access to credit and more favourable terms, while a weaker score may limit your options or make borrowing more expensive. That’s why it’s important to understand what factors might be holding your score back.
Red flags include:
Missed or late payments
Size of other current loans
County court judgments or bankruptcy
Breaching or defaulting on credit agreements
Exceeding credit card limits
Regular credit card cash withdrawals
Too many credit or loan applications over a short period
There are several types of business loans for companies with a low credit score. Just be aware that they typically come with higher-than-average interest rates, larger penalties for late payments, and shorter loan terms. This is due to the perception that a business with a bad credit rating is more likely to default on a loan.
A quick search online typically reveals plenty of companies that offer loans for businesses with bad credit. You may not have heard of them, but providing they’re on the Financial Conduct Authority Register, they could be worth considering for one of the following:
Secured loans – Loans typically from £5,000 to more than £1 million, borrowed over a term that can range from one month to 10-plus years. Interest rates are usually lower than for unsecured loans because a business asset is put up as security. This means the lender can seize your named asset if you default on repayments
Unsecured loans – Typically, loan amounts are lower, loan terms are shorter, and interest rates are higher than secured loans, because of the higher risk to the lender
Asset finance – A form of secured loan where a specific item, such as a work van, tools or machinery, is put up as collateral
Guarantor loans – With this type of loan, a third party known to the borrower guarantees to repay any money owed, plus interest accrued, if the borrower can’t make repayments
Bridging loan – A short-term option, typically offering loans for up to two years to cover periods when money is tight, such as between a contract being completed and the invoice being paid
First, establish what you need to borrow. While it makes sense to add a little extra to cover unforeseen costs, don’t apply for more than you need. Keeping your loan amount down means you pay less interest.
Once you’ve worked out how much you want to borrow, write a business plan that covers the loan. Lenders usually want to see this. Then shop around online for the best business loans. Consider using comparison sites, as well as searching for individual lenders and brokers.
When comparing results, pay attention to the loan term, interest rates, the total repayment sum, and any additional costs, such as late payment or early repayment fees.
When you’re ready to apply, check you can answer all the lender’s questions. This typically involves providing:
The amount you want to borrow, and a business plan
Your company’s annual and monthly turnover, plus staff numbers
The date your company began trading and the sector you serve
Your business’ title and registered office address
Contact details for all owners and partners
It’s worth noting that you must be at least 18 years old with a UK-registered business to be eligible for a loan. If you can’t apply or a business loan doesn’t seem right for you, you may want to consider an alternative, such as crowdfunding.
If you’ve been rejected for a business loan or credit card, or worry that your business credit rating is not good enough, you could try to improve it before applying or reapplying. Here are some suggestions for boosting your credit score:
Run eligibility checks before applying for credit
Avoid making more than one credit or loan application within a six-month period
Close a joint account if the co-holder has a bad credit history
Close any unused accounts or credit cards
Regularly check your statutory credit reports and report any errors
Chase clients for overdue payments
Most lenders don’t offer loans to anyone who has been declared bankrupt, but some do. Note that if you’re classed as an undischarged bankrupt, it is illegal to apply for a loan of more than £500 without informing the lender of your status.
You may be able to get a loan if you don’t have a credit score, as would be the case if you’re starting up your first firm. In this case, lenders draw on your personal credit report. If you struggle to get a business loan, consider applying for a government start-up grant or a government start-up loan.
It typically takes around 5 to 10 minutes to apply, with a decision being made within a timeframe of two days to several weeks or even months, depending on the complexity of the loan. The money is typically in your account within 24 hours of a positive decision.