Are you looking to start up a new business venture? Do you want to expand your SME beyond its current size? If the answer is yes, investment is usually the answer. And that might mean taking out a business loan.
In 2017, small- and medium-sized businesses are expected to have borrowed an average of £41,770 (Zurich SME Risk Index). However, around 10% of SMEs said that they had been turned down for loans by a major bank or building society in the last five years, according to a survey by Cambridge & Counties Bank. This suggests that many businesses are not able to access the funding that they need to grow and thrive.
Bad personal and business credit is one of the biggest obstacles to securing funds for your business. In this guide, we will look at whether you can get a loan, alternative forms of business finance, and how you can improve your credit for the future.
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Will a bank give you a business loan with bad credit?
Probably not. One of the most common reasons that a traditional lender, like a bank or building society, will turn down an application for a business loan is because of a poor credit rating.
These organisations have a process of carrying out a credit check on the applicant, just like they would for a personal loan or a mortgage. If you have a bad credit rating, they are much more likely to turn down your request for business financing, and you may need to consider other options.
Why do lenders check credit for business loans?
Banks and building societies carry out these stringent credit checks to protect themselves from risky lending. Simply put, if you have a chequered credit history, they see you as more likely to have problems in the future. As this could impact your ability to make repayments, there's a good chance that you will be turned down. Even if you've had some recent success with your business, high-street lenders can be unmoveable on their policy towards bad credit histories.
Is business credit and personal credit the same?
No, they aren't. Lenders can check two types of credit history: your personal history and your business history. Your personal credit history is a measure of how your own individual finances have fared, and will include records of things like credit cards, loan payments, and mortgage repayments.
On the other hand, a business credit history looks beyond the individual and considers how the finances of your business has performed. A business credit check will look at things like business loan applications, supplier payments times, and credit accounts to build up a picture of how credit-worthy your company is.
Will a lender look at my personal or business credit score?
Traditional lenders may look at both your personal and business credit records, depending on what type of business you are applying for finance with.
If your business is:
- A sole trader: It's likely your personal credit history will be scrutinised as much as your business's record, as they are closely entwined.
- A partnership: It's likely that the lender will take a close look at the business and personal records for both parties. Even if you have a good rating, your partner might not, which can affect the success of your application.
- A start-up: The lender will evaluate the credit worthiness of each of the directors to see if any have a poor credit history. They will focus on personal scores as there will be no business records to review.
- A small business or limited company: With an established business, it will have a credit record of its own that the lender will focus on. However, this doesn't prevent them from looking at individual records too.
Why is my personal credit score so low?
There are many factors that can impact your personal credit score. These accumulate on your record over a number of years until they are wiped off. The lender will look at your individual credit history and investigate for any tell-tale signs of bad credit.
Let's take a look at some of the most common factors that can affect your personal score.
- Missed or late payments: If you have existing loans or credit card debt and have missed repayments, this can be a sign that you don't always have the funds to maintain the debt.
- County Court Judgement (CCJ): This is an order issued when you don't repay a debt and the lender takes you to court. You then have to pay it back by law. It negatively affects your score and shows lenders that you've had to be chased to repay.
- Individual Voluntary Agreement (IVA): These are an agreement to pay back debts at a rate you can afford. Lenders typically see this as evidence that you have unmanageable debt, and need assistance from a third party to organise repayment.
- Previous bankruptcy or insolvency: If you have declared bankruptcy or insolvency, a lender can see you as a credit risk. If they do agree to lend to you, it might be at a higher rate to protect themselves should the same happen again.
- Applying for multiple loans in quick succession: Should you apply for more than one business loan in a short period of time, this can be flagged up.
- Being turned down for multiple loans: If you've been turned down for credit a few times by different lenders, it doesn’t look good and will negatively affect your score.
- High levels of current debt: If you already have high levels of debt and are applying for more credit, a lender can see this as a negative.
Why is my business credit score so low?
Much like your personal credit score, a lender will look at a number of factors when assessing your business credit history. Some of these, like missed repayments, CCJs, and applying for a lot of loans in quick succession, are considered in the same way as your personal score.
However, there are some factors to do with your business that will be considered too:
- Little or no trading history: When your business hasn't been trading for long, you won't have much evidence of running a successful operation. This will put more focus on the personal credit histories of you and the other owners and directors.
- Late filing of accounts: Should you fail to file your business's return with Companies House on time, not only will you be fined, but your credit history will be negatively impacted too. Lenders can also see this as a sign of irresponsibility.
- Supplier payment times: If there is evidence of poor payment performance (like disputed or late payments) to other companies, lenders can view this as a sign of unreliability.
- Winding up orders: This is a court order that compels an insolvent company into liquidation in order to repay creditors. If your current business or a past business has been subject to one of these orders, it can affect your credit score and loan application.
Should I apply for a loan if I don't think I'll be successful?
If you know you have bad credit, it may be worth looking elsewhere for funding, rather than applying for a regular business loan. As we've mentioned, applying and being rejected can have a negative impact on your credit score and will remain on your record for a few years, so it's often not worth the risk if you're doubtful. In the next section, we take a closer look at some alternative ways that you can secure cash for your business.
If you're not sure what your credit score you have, read our advice on getting a credit report later in this guide, as this will give you a clearer picture of whether you should apply for a loan.
How to get funding for a business with bad credit
If you have been turned down for a business loan with a traditional lender or feel like you won’t be successful with an application, don't despair. It's important that you know that there are other avenues that you can explore to secure funding.
There are a variety of options to consider, including some avenues you might not have thought about exploring. In this section of the guide, we will look at the possibilities out there, as well as their positives and negatives.
Bad credit loans
Although we've discussed in detail about how you might find it difficult to qualify for a business loan with a traditional bank or building society, it may still be possible. Many offer specialist bad credit products, and there are also lenders who specialise in poor credit loans.
These are usually unsecured loans that have adopted a slightly different approach to accommodate businesses with a chequered past. They often use factors like whether your company is performing well, reputation, and looking at customer reviews to gauge how trustworthy you are, but they can offset the risk of a bad credit history by offering a higher interest rate than usual.
It's always worth bearing in mind that this option will cost your business more in the long-term and there is greater risk to your business if you default.
Start Up Loans
The UK Government established the Start Up Loans initiative in 2012, with the aim of providing personal loans of up to £25,000, as well as support and mentoring, to help start-ups and early-stage businesses get off the ground when they can't secure funding from a traditional lender. To be eligible, your business must have been trading for less than 24 months, be one of the government's approved business types, and must not be planning to use the loan for something listed as an excluded loan purpose.
While these loans are designed to help businesses that can't get a high-street loan, there is still a credit check and application process that must be passed. And, as a Start Up Loan is a personal loan, the check will be carried out on your personal history. This doesn't mean that you will necessarily be turned down for having bad credit, but it may impact your application.
You can't apply if:
- you are filing for or are currently bankrupt, or have a Debt Relief Order.
- you have an outstanding IVA or Trust Deed.
- you are on a Debt Management Programme or Debt Arrangement Scheme.
- you have an outstanding CCJ.
The Start Up Loans Company also needs to see a business plan, cash flow forecast, and personal survival budget before they will approve a loan, though you are assigned a business advisor to help you put these things together.
Business cash advance
One way of securing funding without having to apply for a business loan is through a business cash advance. Here, an amount is borrowed upfront, then repaid via an agreed percentage of your customer card sales. For example, if you took out a 15% business cash advance, when a client is charged £100, £15 would go to the lender and you would keep £80. Essentially, the lender is purchasing a portion of your future card sales.
The amount of interest on your advance is agreed upfront, and remains the same throughout the payback period. This works differently to a traditional loan, which sees interest accumulating over the length of time it takes to repay. With a cash advance, you know exactly how much you will be paying back right from the start. The total repayment amount is split into the cash advance you receive to channel into your business, plus the interest; for example, if £10,000 was needed, the total repayment might be £12,000 (with a 20% interest payment of £2,000). This amount would then be repaid as 20% of £60,000 card sales from your business.
One of the main draws for business cash advances is that most lenders will weigh their decision on your application towards your business's potential earnings, rather than a credit check. This means that if you have bad credit but a thriving business, a cash advance is a viable alternative.
However, a major drawback to cash advances is that the typical interest paid is very high for a short-term loan, and even if you were to pay it back sooner than anticipated, the amount would remain the same. With this in mind, it's often worth exploring your other options first before taking out a business cash advance.
Invoice financing is another viable alternative to applying for a business loan. With this type of loan, you receive a designated amount, which is paid back by granting some of your accounts receivable as unpaid invoices. This means that if you are owed money by clients, you can access close to the full amount from a lender within days, rather than the weeks you could be waiting. The lender is paid back (plus fees) once the customer pays.
Invoice finance is a good option for those with bad credit because the applications are judged on how much in invoices you are due, rather than your credit history. If your business belongs to a sector where payment can be a long time coming, cashing in the invoice early can help to improve cash flow and ensure there are no problems.
While invoice financing can be useful, it also has its drawbacks. One factor to consider is whether your customer relationships will suffer if you hand over credit control duties to a third party, especially when their primary concern is collecting payment. If mishandled, there can be a real risk of alienating your customer base. There is also the fact that if your customer disputes the invoice, the cash you unlocked straight away will be withdrawn by the lender.
If you have bad credit, the stumbling block will always be the credit check when applying for a traditional business loan. However, with asset refinancing (also known as a secured loan), you can circumvent the need for a check by offering something of value to secure the terms of the loan. Should you have an asset of value that falls within a lender's requirements, you can then take out a loan against it and pay back with interest as usual. Because the asset has secured the loan, there is less risk for the lender and more flexibility over who they can offer funding to. Your credit score won't be affected if you miss a repayment or default on the loan, either.
Here at H&T, we can offer attractive asset refinancing options on your valuables with no need for a credit check. You can use your asset to secure essential funds between £250–£50,000 for your business, then pay back the loan over a period of up to 6 months. We'll keep your assets for the period of the loan, where they will be secured and insured. You can find out more about how it works, take a look at our FAQs, or contact us if you have any questions.
We have a flexible in-house valuations team, so we can accurately value a whole variety of items, including gold, watches, jewellery, art and antiques, and cars. We try to be as accommodating as possible, so it's worth getting in touch if you have something in mind you'd like to secure your loan against.
Crowdfunding is a form of funding that sees a business set out its stall in the hope of attracting investors. This often comes in the shape of many people contributing a small amount, rather than one or two angel investors. This method of raising capital has really come to the fore over the last decade or so, with the internet making easy communication and payment possible.
There are two main types: reward crowdfunding and equity crowdfunding. In reward crowdfunding, there is usually a product or service that is made available for pre-sale, so the business can be launched without racking up debts or exchanging equity. With equity crowdfunding, the business presents their idea and makes shares in the company ownership available for investors to buy. This type of crowdfunding also comes with potential return on investment if the venture is a success.
Crowdfunding might not be suitable for all types of businesses, especially those that offer services, as the format lends itself towards inventions and tech products.
Both types of crowdfunding also have individual drawbacks, too. For example, by offering rewards you are putting a lot of pressure on your business to deliver the goods to investors, which can often cause projects to fail and deadlines to be missed. On the other hand, equity crowdfunding will see a sizeable portion of your business sold off, so if you do earn success, the pay-off won't be as great.
A friendly loan is a loan agreement that is made between family, friends, or acquaintances. The majority of these arrangements are undocumented, often relying on a verbal agreement between the two parties. These are the most common type of loan, and many successful entrepreneurs have had a helping hand financially from their close friends and family.
A loan from somebody who knows you well and believes in your business plan is likely to be one of the most accommodating agreements you will find. And, because the friend or family member can vouch for your character and history, it's much less likely that they will want to check your credit like a bank or building society.
While getting funding from your loved ones has many upsides, it's worth remembering that there can be a lot more at stake if you aren't able to pay the loan back and you should always ask for money only if you know you will be able to return the sum. There's also the fact that some people simply aren't comfortable asking their loved ones for cash, which can be a problem.
Business grants, funds, and other support
While the majority of the options that we've discussed in this guide are some form of a loan, there are also a wide range of business grants and funds available to entrepreneurs who are looking to move up the ladder. These include organisations and bodies that can directly award start-up cash to your business, to others that can offer free advice to help you get up and running.
It's worth taking a look at what is available to you, as you could be missing out on some essential support if you don't do any research. The government has a funding and advice tool that you can use to locate the best options for your company both on a local and national scale.
Are there risks to borrowing with bad credit?
For most types of alternative finance, there is a risk to your finance if you aren't able to keep up the repayments, so careful consideration is always advised. It's perfectly understandable that you want to secure essential funds for the future of your business, but it's worth looking at the long-term effects that bad credit borrowing can have.
Should your business continue to be successful and you're able to pay back what you owe, it can actually boost your credit score. However, if your financial problems get worse, a bad credit loan with a higher level of interest could sink your business completely. Weigh up how desperately you need the cash right now and make an informed choice. It might be worth trying to recover your credit score over the next few years rather than decide rashly and regret it further down the line.
Also, it's worth remembering that not all of the options we've discussed in the previous section carry the same level of risk. For example, applying for and receiving funds as part of a business grant is virtually free of any risk, unless there are conditions set as part of the application. There are borrowing options, such as business cash advances and invoice finance, that are designed to be paid back as you earn, so there is less pressure to pay back set amounts at regular intervals. Asset refinancing is less risky to the finances of your company too, as the cash you've borrowed is secured against your belongings and won't affect your credit score.
How to improve your personal and business credit for the future
If you aren't able to access a traditional business loan because of a poor credit history, it's in the best interests of your business to work towards improving your situation for the future. In this next section we will look at the steps you can take to get back on track.
Get the right credit report for your business
The first thing that you should do if you have been turned down for a traditional business loan, or you are confident you will be rejected, is to get your own credit report. This will allow you to see the information that the banks and building societies see, and spot any ways you need to improve.
We've previously discussed that there are personal and business credit scores that could affect any loan application you make. There is a different type of credit report for each, so you need to identify whether just one or both are necessary for your company: take a look at our advice above to find out which you need.
Next, you should order one or both credit reports from a provider that a lender is likely to use, which will be Experian, Equifax, or Call Credit, the major credit report companies in the UK. A lot of people like to order a report from more than one of these providers, so they can check the same information is being shared consistently.
Analyse your credit report
When you've received the credit reports you need, you can take a look to see what might be putting lenders off. Your document will show items of information like your repayment history, loan applications, and CCJs and bankruptcies, among many other details.
It's worth taking the time to go through the report and cross-reference the data with your own records, to make sure that there isn't any false information being sent to lenders. If you do find something amiss, you should get in touch with your report provider to dispute the information. In most cases, they will be happy to investigate the item in question and will contact the creditor or relevant organisation on your behalf.
Address any ongoing flaws in your credit
If you can see any aspects of your credit report that are obviously holding you back, you will need to address them before moving forward. We've covered what affects both personal and business credit scores in this guide, so if you can see any of those recorded, they are probably part of the problem. Some factors, such as a previous CCJ or bankruptcy, can't be erased and you will just need to wait until they expire. For most of these items they are cleared after six years.
You should also look to pay off any loans that still have time to run, as it looks better to apply for a new loan with a clear slate. If you've missed payments on loans and credit cards in the past, make sure that you don't in the future, as these can peg back your score.
Begin to build your personal credit rating
Once you have ironed out the ongoing financial problems you've suffered from in the past, you can begin to rebuild your personal credit score with some strategic credit and repayment. It might seem counter-intuitive at first, but keeping a low level of carefully regulated debt can be the best way to improve your performance.
Though it can be beneficial to close unused credit accounts, be sure to keep a couple open as they can be a good way of building your credit rating. Older accounts have more value than recently opened ones, and responsibly maintaining those you've had for a while can show lenders that you are able to keep track of them and balance the books. A bank account overdraft is also another form of lending that can build a credit rating by showing that you can stay within spending limits.
If you do need to open newer lines of credit, try to space out your applications. This is because a flurry of new cards and loans can suggest that you are going through a period of overreliance once more, which is something you've worked hard to recover from. Should you wish to take out a new card or loan, try to leave a three-month gap between your last application and the new one.
If you've got a great personal credit score but need to work on your company's, the next section has some business-focused tips.
Take the right steps with your business
Just like taking the right steps with your own personal credit, you may find that your business's score needs some work too. The same pointers will work well towards building your company credibility, including clearing any long-standing debts and keeping a well-managed line of credit open, but there are some things that you can do that will only really work for a business.
One of these tips is to get into the routine of taking care of invoices as soon as you can, as a lender can view this as a reluctance to pay due to poor finances. So, when an invoice from one of your suppliers arrives, don't delay in processing payment and maintaining a good relationship with them.
Make sure that you always file your business's accounts and tax returns with Companies House on time, as lateness can be perceived as a sign of financial distress. What's more, credit agencies find it preferable to have full, not abbreviated, information about accounts, so it's well worth the time to provide more detail about your business.
Finally, once you've got your business credit on an even footing, take care to closely monitor your score in the future. By accessing a regular report, you will be able to spot any changes that could affect your business's status and address them before it's too late.
If you follow the advice in your guide, you will be able to understand why your company has poor credit and you may be able to secure a loan. You will also be able to work towards improving your personal and business credit for the future.
Remember that, here at H&T, we offer an asset-based loans service which can help you access essential funding quickly and conveniently. Our knowledge centre is also full of great financial advice, so be sure to take a look there too.