How to get a business loan with bad credit
Get a small business loan with Iwoca. Apply now.
Get started
- Borrow from £1,000 to £200,000 over 12 months
- Repay early with no fees
- Decisions in 1 working day
- Help from a dedicated account manager
If you’ve got a bad credit score then applying for business finance can be daunting. However many lenders will still consider businesses with a bad credit score. It’s worth researching and finding out more about your options to see if you can find a suitable loan.
In this guide we explain how to get a business loan with bad credit. We also answer common questions like “what business loans are most suitable for bad credit?” and “can you get a start up business loan with bad credit?”
Table of Contents
What is bad credit?
Bad credit is when an individual or business has a low credit score. This credit score is assessed by a credit reporting agency and the information is shared with potential lenders. A person or business with a low credit score may find it harder to be accepted for a loan or may be offered higher interest rates than someone with a high credit score.
A low credit score is caused by a person or business’s credit history. Credit reporting agencies get feedback from lenders on their customers and keep a record of the credit history of each person.
Here are some of the issues that may cause a bad credit score:
- A high level of debt
- Taking on lots of loans in a short period
- Defaulting on loan payments
- Historic court judgements
- Bankruptcy orders
- A historic winding up order where a business you own has gone into liquidation
- Mistakes on your credit record, like no personal address or the wrong address recorded
How does bad credit affect business loan applications?
A person or business with bad credit may find it harder to be approved for business finance. Lenders perform credit checks on an individual or business when they apply for a loan. This means that they ask a credit report agency to give them information on a personal or business’s credit score.
If a person or business has a low credit score, they are seen as more risky by lenders as they may be more likely to default on future loan payments. This means borrowers with bad credit may be turned down for business loans or offered loans with high interest rates.
It can be particularly hard to secure business finance for new business with bad credit. This is because it is common for new businesses to run out of money in their first year so lenders view them as risky borrowers.
Can I get a business loan with bad credit?
Although having bad credit makes it more difficult to be accepted for a business loan, it may still be possible to secure business finance even if you have a bad credit. Here are some tips to help you improve your chances of being accepted for a business loan:
- Work on improving your credit score. Simple errors or out of date information may affect your credit score.
- Apply for a business loan that is designed for businesses with bad credit. These are often more expensive than standard business loans.
- Look for lenders that perform soft credits checks. These won’t leave an imprint on your credit record.
- Consider using a business loan broker. They may be able to suggest lenders where you are more likely to be accepted.
How to build business credit or improve your personal credit score
Individuals and businesses can gradually improve their credit score by doing the following:
- Make loan repayments on time.
- Consider putting off unnecessary personal purchases and not taking on too much personal debt. Lenders look at your loan utilisation. This is a measure of your total borrowing versus your total available credit.
- Don’t take out too many loans. This suggests you urgently need cash and may be struggling with your finances.
- Check your credit record for mistakes as these may impact your credit score.
Take a look at some more of our tips for improving your credit score here.
What business loans are most suitable for bad credit?
Here are some business loans that may be suitable for businesses or individuals with bad credit:
- Bad credit business loan - some brokers and lenders specialise in bad credit business loans. You may be offered a smaller loan amount or higher interest rates than a business with a good credit rating.
- Guarantor business loan - this is where you get someone you know to guarantee the loan. They will be legally responsible to repay the loan if you default.
- Asset finance - this is a secured type of loan that is used to buy or rent business assets.
- Invoice finance - this is another type of secured loan where you receive a cash advance based on the value of your customer invoice book.
- Merchant cash advance - a merchant cash advance is where lenders advance cash based on your future customer card sales. Many lenders don’t perform credit checks so this type of business finance may still be available if you have a bad credit rating.
- Crowdfunding - this is where you sell part of your business to a group of individual investors. It may be suitable if you have a poor credit rating as potential investors will be more interested in the financial health of your business than your personal credit rating.
- Angel investing - business angels are wealthy individuals that invest in small businesses. They are interested in the financial performance and potential of your business and may overlook a bad credit rating.
- Start up loan - this is a government backed loan scheme for small businesses. You will still need to pass a simple credit check and you won’t be eligible if you are bankrupt, are on a debt relief order, have an outstanding individual voluntary arrangement or are on a debt management plan.
How can I get a business loan with bad credit?
The application process for a business loan is similar whether you have good or bad credit. However there are some extra steps if you’re applying for a business loan with a poor credit rating:
- Research type of finance and consider finance that is suitable for businesses with bad credit.
- Find a lender or broker that performs a soft credit check.
- Gather information together to prove your business has a strong financial record.
- If you are accepted for a loan then consider all the costs involved before you make a decision. Make sure you include interest, fees and any penalties.
- If you can’t find suitable finance or you are offered a very expensive loan, it may be possible to expand your business more slowly and avoid debt.
Where can I get a business loan with bad credit
Here are some providers that specialise in bad credit business loans:
Frequently asked questions
Every lender has different eligibility criteria so it’s important to check if you are eligible before applying for a business credit card. Some lenders offer credit cards designed for businesses with a bad credit rating. Another option is to build your credit by using a prepaid card or a business charge card where you clear the balance every month.
Yes it is possible to start a business with bad credit. You may need to build the business up slowly as you are likely to have limited options for business finance.
It is possible to open a business bank account with a bad credit rating. Some lenders don’t perform credit checks on their simple business bank accounts. You may not be offered an overdraft on this type of business bank account.
Having bad credit may affect your business loan interest rates as lenders may consider you to be a higher risk borrower. You are likely to be offered a smaller loan amount and higher interest rates than a borrower with a good credit rating.
It may be possible to get a start up business loan with bad credit. However you will not be considered for a start up loan if you are bankrupt, are on a debt relief order, have an outstanding individual voluntary arrangement or are on a debt management plan.
A personal bad credit score may affect your ability to secure business finance. That’s because many lenders will assess your personal credit score when you apply for a business loan.
It may be easier to get a secured business loan, rather than an unsecured loan, if you have a bad credit rating.
If you’ve been refused a business loan you should consider other sources of finance like crowdfunding or an angel investor. You could also decide to expand your business more slowly to avoid taking on debt.
If you have bad credit, you may have to give a personal guarantee on a business loan. It depends on the lender and the type of finance you are applying for.