Business always carries with it a risk of failure – it takes guts, an idea, and a significant amount of drive and determination to strike out on your own. Business is not easy and many Brits who make their first (and sometimes second) attempt to open a company fail incurring personal debts along the way.
Rather than having their bravery recognised and rewarded, many are left with a bad credit rating. In other words, the people who are willing to take a chance and to build something of value which employs people and pays it taxes have additional obstacles placed before them if they want to make another attempt at going it alone.
If you’re looking for a bad credit business loan, there are options out there for you – albeit limited compared to applicants who have better credit histories.
In this article, we look at:
- what a bad credit business loan actually is
- the factors that lenders use to assess your application
- the four main types of finance offered to bad credit business applicants
- the cost of borrowing for bad credit business loans and finance
- what you can use bad credit business finance for
- other types of business finance on offer to people and companies with poor credit
- the most frequently asked questions about bad credit business loans
- how to use a broker to apply for a bad credit business loan
If you want help finding the best business loan for your company and you’re concerned about the restricted choice you have if you or your company has a poor credit rating, please fill in the form at the top of the page. We’ll take time to find out more about you and what you do and then we’ll carefully match you with the lenders on our panel most likely to approve your application.
Our service is free and there’s no obligation on you to accept any offer we find on your behalf.
What is a bad credit business loan?
A bad credit business loan is a type of loan made to a business (whether a sole trader or a limited company) where the credit rating of the person and/or the company is either:
- lower than a lender’s preferred credit score and/or
- lower than the average credit score for a person or business in the UK.
How do lenders assess whether they’ll approve a bad credit business loan?
Each lender has a “borrowing profile” – their borrowing profile is a description of the ideal person or company they’re happy to lend money to. The closer a borrower is to a lender’s borrowing profile, the more likely they are to be accepted and offered a lower interest rate and vice versa.
Lenders will consider, when making a decision on your application for a loan:
- your credit score,
- your business’s performance,
- the amount of money you’re asking for,
- how long you want to pay it back, and
- whether they think it’s affordable with your current cash flow.
Some lenders, particularly High Street banks, will want to see a business plan and financial forecasts for up to the following three years. They may also want to see bank statements for the previous year or more to get a better idea of how money moves in and out of your account.
Other lenders use algorithmic modelling meaning that they will let you know the outcome of your application in minutes – many personal finance sites use the same technology.
Factors affecting credit scores
Both your personal credit score and your company’s credit score (if you have a limited company) are affected by a number of factors, specifically:
- how much debt you have available to you (limit) and how much debt you’re using (balance) – the bigger the gap between your limit and your balance, the better
- number of missed and late payments
- the number of times you apply for credit within a short space of time – too many makes it look to a lender that you are desperate for money even if you are just searching for the best deal.
- whether you have been bankrupt in the past or subject to a company or voluntary individual arrangement
- if you or your company have any County Court Judgements recorded on your credit file.
The lower your credit score, the more likely your application is likely to be rejected. If it is accepted, you are likely to be asked to pay a higher rate of interest on your facility than a borrower with a better credit history.
If you are applying for a loan in the name of your limited company, your personal credit score will be considered by a lender however they will likely place more emphasis when making their decision on your company’s credit score and what’s recorded at Companies House.
Quick steps to improve your credit score
Recent reports have suggested that there are mistakes on over 10 million UK credit files so the first thing you should do is to check what information is recorded on your file with the four main credit agencies.
Even if the records are accurate, you should make sure that, from this point on, you meet all bills in time and in full. It would be wise to close any unused credit accounts and to pay off in full as many of the balances as possible.
If you’re applying on behalf of a limited company, you should also make sure that all Companies House and HMRC filings are done accurately and on time (including your confirmation statement).
Over time, you and your company’s credit scores will improve by following this advice but the effect will be gradual.
The 4 main types of bad credit business loan
Unsecured bad credit business loan
A standard bad credit business loan for a limited company is essentially the same as a personal loan except that the loan is paid to the business and the business is responsible for repaying the loan. Unsecured bad credit business loans are available for sums of £1,000 and upwards and generally repayable over up to 5 years.
For sole traders, any unsecured bad credit business loan is exactly the same as an unsecured company loan in that, although you intend to pay back the loan from the profits of your business, you are personally responsible for repayment in the event that your company ceases trading.
For limited company shareholders, you and any other shareholders in your company will likely be asked to sign a personal guarantee as a condition of being approved for a loan – more on that later in this article.
Asset finance for bad credit applicants
Asset finance is used by companies wishing to buy in plant, machinery, IT, and other business equipment. Asset finance is generally secured on the asset itself meaning that, if you don’t keep up repayments on the facility, then the lender is legally entitled to take possession of the asset.
This may be a better option for limited company owners where bad credit history may be a factor because the lender can recoup most or all of any outstanding balance because of the inherent value of the equipment itself.
Merchant cash advances
More retailers and businesses than ever before allow their customers to pay them by credit or debit card as well as in the more traditional ways.
Merchant cash advances allow you to borrow up to 2-3 months’ average turnover where the payment was made by credit or debit card. Instead of making monthly repayments, a merchant cash advance lender takes up to 10% of the payments made to you by your credit and debit card payment processor until the balance is paid off. You should expect to pay an effective interest rate of between 10% and 50% of what you borrow when using a merchant cash advance.
Most merchant cash advance accounts are settled within 10 months of the facility being agreed. Nearly all merchant cash advances do not require a personal guarantee however they are significantly more expensive than traditional unsecured loans
Invoice finance is suitable for companies which send out invoices for later payment – in the UK, the standard time given to customers to pay by invoices is 30 days.
With invoice finance, you sell the value of the invoice to a finance company. When you do this, the finance company releases up to 90% of the value of your invoice the following day to you. You receive the remainder minus the factoring fee when the client finally pays.
Invoice factoring allows you near immediate access to the funds you’re expecting up to 30 days (or however long you give your customers to pay) before you would normally receive it.
Invoice finance is a particularly competitive market with some companies requiring you to sell them all of their invoices and others happy to be used on the specific invoices you choose. Only a handful require a personal guarantee and, as we cover later in this article, you should try to avoid personal guarantees whenever possible.
Will my company’s borrowing be more expensive because of bad credit?
Business borrowing is more expensive for people and companies with bad credit because of the perceived higher risk of non-payment or default.
However, this is not the only factor determining the cost of your loan. Other factors include the age of your business, how sustainably profitable it has been over the last 2-3 years, and your line of business.
What can I use a bad credit business loan for?
You can use a bad credit business loan for any business purpose including shoring up working capital, investing in equipment, paying off an unexpected or higher-than-expected bill, and settling accounts with supplier and HMRC among other reasons.
What other types of credit might be available to my company?
Your application is more likely to succeed if you are willing to secure the loan you wish to take out on property (like your personal home or part of any buy-to-let portfolio you have). You may also benefit from lower interest rates.
However please bear in mind that your home is at risk of repossession if you fail to keep up with any loan or other credit facility secured on it.
Business guarantor loan
One well-known provider of guarantor loans offers loans to the self-employed if a guarantor can be provided. With a guarantor loan, someone you know volunteers to become responsible for repaying the loan if you’re not able to.
Bad credit business loans FAQ
Will I need to provide a personal guarantee?
With many forms of bad credit business loans as well as other corporate finance facilities, you may be asked to agree to and sign a personal guarantee as a condition of your loan application being accepted.
Personal guarantees (sometimes called director’s guarantees) are only required of the shareholders and directors of limited companies.
The reason for this is that a shareholder’s liability to pay their company’s debt is limited to the value of their shareholding. For example, many companies have less than £10 worth of shares issued between one or more shareholders. If a company takes out a loan for £100,000, its directors, who are in control of the performance of that business, may only be liable for a few pounds worth of that debt if the company becomes insolvent.
For many lenders, they feel that this lack of personal exposure to company debt will not sufficiently motivate the directors to run the company well. As a result, they will insist that a personal guarantee be signed meaning that, should the company become insolvent, that its shareholders will be jointly and severally liable for repaying the remaining balance.
There are finance companies which do not require a personal guarantee on limited company loans but they are currently more the exception rather than the rule. The companies which do not require them tend to lend smaller amounts of money.
For sole traders and partnerships, you will not be asked to sign a personal guarantee because, in essence, any loan to your business is a loan to you individually meaning that you’re liable to repay the loan personally anyway.
Do I need to be a homeowner to qualify for a bad credit business loan?
You don’t need to be a homeowner to qualify for a bad credit business loan although it may help improve the likelihood of your application being approved.
There are a number of different business loan providers who require the security of a residential property (whether primary or part of a larger portfolio) as a prerequisite to considering an application let alone approving one. Together lends between £26,000 and £500,000 to business owners as long as their loan is secured on a property with a maximum LTV of 75%.
Please remember that your home is at risk of repossession if you do not keep up repayments on any loan or financial product secured on it.
If I get a loan and miss a repayment, what happens to my credit score?
If you or your company fails to keep to its loan repayment schedule, there will likely be negative consequences to you or your company’s credit score. In most cases, one missed repayment will not move you or your company’s credit score down however multiple missed repayments almost certainly will.
If the loan you’ve secured is for your limited company, the negative consequences of repeated missed repayments will be reflected on your company’s credit score but probably not your personal one.
If you’ve secured a loan as a sole trader and you miss multiple agreed repayments, your credit score will likely decline steeply within a short space of time.
If you or your company default on a loan, the chances of any future application for credit being favourably considered for the next few years will be minimal.
Start up business loans with bad credit
If you have a poor credit score, you will have a much more limited choice of financial services companies willing to work with you to fund your new venture. This is because you’ve had trouble personally in the past managing your own finances and because there is a severe risk of income disruption during the first 3 years of a new business trading.
You may wish to consider applying to the Start Up Loan Company – this is a government-backed mini-venture capital fund offering unsecured personal loans to sole traders, partners, and directors for up to £25,000 to start a new business.
Please note that, because this is a personal loan, you will be credit checked as part of the process and adverse information may count against the chances of your application being approved.
Will lenders let me top my loan up if my business needs extra cash?
Whether a lender will allow you to borrow more money when you have an existing account with them is up to the lender. Some may allow it (either as a new account or by amending the details on your existing account) but only after you’ve paid down a certain proportion of the balance.
Applying for a bad credit business loan
You can apply direct to lenders or work with a broker to find you a bad credit business loan or other financial solution.
If you’d like our team to search on your behalf, please fill in the form at the top of the page. Once we’ve found out more about you and your business, we’ll then seek to match you to the lenders most likely to want to work with you and most likely to offer the best rate on the most favourable terms.
Our service is completely free of charge and you don’t have to accept any offer made to you by lenders on our panel.