How to get a business loan when you have bad credit
What to look out for
- Red Do not apply for numerous loans as this will further harm your credit score
- Amber Bad credit can be improved by paying off old debt and managing new debt responsibly
- Green Bad credit business loans can be secured from a range of specialist loan companies
Is bad credit stopping you getting a business loan? Discover the finance options available if you or your business has a poor credit rating.
What is bad credit?
Bad credit is when an individual or business is predicted to be unable to repay debt on time and in full, based on a previous history of debt repayments and personal finance information.
A credit history exists for anyone who has ever taken out a loan, used a credit card or paid a bill by instalment. This history includes the amount, frequency and promptness of payments being made on time. It also indicates the total debt of a borrower, the length of their credit history and any credit checks.
This is summarised in a score. A low credit score means that borrower is considered a risky prospect.
How could bad credit stop me getting finance?
A person or business with bad credit will find it harder to be approved for a loan. Those seeking business loans for poor credit may only be offered credit at high interest rates, reflecting the greater risk they represent to the lender. Bad credit can be improved gradually by paying off old debt and managing new debt responsibly.
Securing start-up business loans with bad credit can be particularly tricky as small businesses are already viewed as risky by lenders, meaning a business without a solid financial history is considered an even higher risk.
It’s important not to apply for numerous loans, as this will further harm your credit score. Each application, even if refused, generates credit checks that will go on your credit file, suggesting an urgent need for cash. This could lead to further refusal or higher interest charges.
Where do I find bad credit business loans?
Bad credit business loans can be secured from a range of specialist loan companies and organisations, although some High Street banks will provide finance to a business with bad credit.
If the borrower has property as security, a secured loan is an option. However, it’s more likely that an unsecured loan is the only viable option. No credit check business loans are even available at a much higher interest rate.
Guarantor loans are unsecured loans that will require a nominated individual or business to cover missed loan payments. These also offer lower interest rates than other unsecured loans.
Peer-to-peer loans are another option. As the finance is sourced from multiple lenders, you owe your money to hundreds of investors that are signed up to the lending platform. However, these will be subject to higher interest rates for bad credit.
Business credit cards for bad credit are also available and could help you avoid interest and improve your credit record if they are repaid in full each month. However, credit limits are often below £1,000 and rates are high if you take longer to pay them.
Credit unions are another type of lender to consider. Regulated by the Financial Conduct Authority, credit unions lend money at an affordable rate to their members. To ensure they only lend to members who can repay the loan, they assess income and how much money borrowers have been able to save.
Credit unions offer a range of business loans, including instalment loans, lines of credit, start-up loans, business credit cards and bad credit commercial mortgages.
Some credit unions act as intermediaries for SBA (small business administration) loans, which are guaranteed by the Government for up to 85 per cent of their value, while a personal loan could also be an option.
Start-up loans for bad credit will require the borrower to submit a solid business plan and financial projections for at least one year with the application.
What are the costs of bad credit business loans?
The interest rates on bad credit loans are higher than for other types of loans, due to the higher risk they present. There may also be fees charged for early repayment and late payment penalties.
This is less the case for credit unions. The amount of interest credit unions can charge on their loans is three per cent per month (one per cent in Northern Ireland) or 42.6 per cent APR.
How much longer could it take to secure finance with bad credit?
It shouldn’t take much longer than a standard loan, although applications for some bad credit loans, such as SBA loans, are known to take slightly longer.
The time the application process takes depends on the type of loan selected. A line of credit or a credit card could be approved within days, while an instalment loan or commercial mortgage could take several months from beginning to end.
What security would I need to secure a bad credit business loan?
For most loans for a business with bad credit, a personal guarantee by all owners with a stake of 20 per cent or more in the business is enough. If the loan goes into default, these individuals are personally liable for the debt.
For commercial mortgages, the property being purchased acts as the security, and can be repossessed if repayments are defaulted on.
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