For small businesses, a short term loan can be an excellent source of financing and growth. However not all businesses will be eligible, and credit rating can play a major role in failure to be approved.
Whilst there’s no hard and fast rule around what constitutes ‘bad credit’ in a business loan application, the more you know, the more likely you are to be approved. And rest assured: even if you do have credit issues, there are a number of business loans available for bad credit.
Personal credit can impact your company’s ability to take out a business loan, and that’s true whether you’re a sole trader or a Ltd. Here’s a brief breakdown of three common business types, and how personal credit may affect them:
In a lender’s view, you are your business. This means a short term loan provider will look at your personal credit score and business credit score with equal weight. They’ll also look at your credit history to see how timely you are with repayments and how many lines of credit you have right now.
This means lenders may be more lenient with sole traders who have an excellent personal credit score, but a slightly rocky business credit history.
If you’re in a partnership, you can expect the personal credit scores of the other founders to impact your loan eligibility. This can be good or bad, depending on the credibility of your partners, and who has what stake in the organisation.
Most lenders won’t give all of your partners’ credit scores the same weight, unless you all have equal control over the business. The person with the greatest responsibility over your business will be the main source of your partnership’s personal credibility.
Personal credit scores become much less relevant in Ltds – although they may not be overlooked entirely. Whilst lenders will primarily review your business’s credit score and credit history to assess your suitability for a loan, they may want to see your directors’ personal credit scores and history for reassurance too.
Individuals in a limited company can also offer a personal guarantee to potential lenders if they have a high personal credit score.
There are a number of factors that will affect the credit score of your business, namely:
Credit associations will use publicly available information to gauge your company’s financial performance. This helps them estimate how much cash you have available to repay any loans that you might take out.
The personal credit history of your company’s directors will contribute to your business credit score. This includes individual voluntary arrangements (IVAs), associations with other failed businesses, and existing personal debt.
Credit associations will look at other members’ credit history, depending on how involved they are in the business. The fewer senior people there are in your company, the more important their personal credit will be during the approval process
A winding up order is placed upon a business when they have more debt than they can reasonably repay. Being forced to liquidate assets in this way will seriously affect your business’s credibility in the eyes of the lenders.
More established businesses tend to have higher credit scores, especially if they can demonstrate steady, consistent growth.
Finally, your business’s credit utilisation will also affect your credit score. This is the percentage of your maximum credit that you are currently spending ( the lower the better, as far as the lenders are concerned).
Yes, it’s still possible to get a business loan when you have bad credit.
That being said, this is not an ideal situation to be in. And there are several drawbacks to consider. For example, interest rates will be higher, loan amounts smaller, and lenders will be less forgiving. So before committing to business loans for poor credit, you should speak with an advisor to assess the options on the table.
If you’re sure that taking on loan finance is the right decision for your business, you have a few options. Traditional banks and lenders may not be available to you, but by following the tips below, you can find financing without them:
Instead of applying for traditional financing (which can damage your credit further) look for lenders that specialise in bad credit business loans.
Taking out a large loan risks not only aggravating your business’s debt problems, but it can also lower your business credit score. Start with smaller loan amounts and focus on paying them back, so you can build a credible track record.
If your business is having difficulty being approved for a business loan, consider using your assets as collateral. This can improve your chances of approval while also lowering interest rates. Just make sure you understand the likelihood of losing your assets if you miss repayments or default on the loan.
Reducing your company’s outstanding debt is always the best approach to take, provided you have the resources to do so. It will raise your business’s credit score and lower your utilisation rate, ideal if you want to make yourself a more attractive prospect to the lenders.
The term is the length of a loan’s repayment period. Long-term business loans typically have a term anywhere between one and ten years. Short-term business loans will typically be repaid in a matter of months.
Short-term business loans are ideal when you need a quick injection of cash, usually to cover an emergency or shortfall. The loan amounts are smaller, but they have higher interest rates and instalments, which can make them difficult to repay.
Long-term loans are better suited when you have steady cash flow. The application and approval process may take longer, but these loans tend to come with higher borrowing amounts, lower interest rates, and smaller monthly repayments.
In this section we’ll take a look at what you need to have worked out, before applying for a business loan designed for poor credit.
According to the Nav American Dream Group Survey, 45% of small businesses didn’t know they had a business credit score, 72% didn’t know where to find their score, and 82% didn’t know how to interpret their score. It’s the key piece of information every lender will look at, so you will want to purchase your business’s credit report from Dun & Bradstreet, Equifax Business or Experian Business to get familiar with it.
Lenders want to know that you have a plan for how you’re going to use the loan. Create a fully costed forecast and show how the funds will help generate additional revenue. Specifically, make sure you can show evidence of meeting your future repayment obligations.
Lenders also want to see that you’re being pragmatic with your funding. Budget accordingly and you’ll be far more likely to qualify for the loan amount you need.
Budgeting shouldn’t just cover what you’re going to spend, but also what you can afford to repay. Be sensible and reserved with your estimates, to increase your chances of approval.
Not qualifying for a loan doesn’t mean the end of the road for your business. There’s a whole host of other funding options well worth considering:
Business Grants are a free source of funding provided by the government designed to help businesses who have difficulty accessing the necessary level of finance elsewhere.
Crowdfunding is a viable option for new businesses who don’t meet the requirements for a traditional loan. Rather than being judged against your track record you’ll be able to leverage future performance by exchanging funding for equity.
If your company is looking for a business loan to fund an expensive asset, you may want to consider asset financing. This could be in the form of leasing equipment, paying in monthly instalments, or renting.
Invoice financing is another viable alternative to traditional lending. The lender pays you for a percentage of an outstanding invoice, and once the invoice has been paid, you repay the lender plus some interest.
Yes, there are business financing options that will provide you with a loan without checking your credit. However, these lenders are not common and will likely offer unfavourable terms when it comes to the amount of interest you’ll have to pay.
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