Having a poor credit history can often get in the way of successful applications for business loans, particularly if you’re applying via traditional routes such as major banks. If a bad credit file is working against you, there are a few things that can be done though — and it’s often possible to get a business loan with bad credit.
What can cause a bad credit profile?
Fundamentally, the reason having a difficult credit history makes lenders unwilling to lend is because it’s your track record of paying debts on time. Quite simply, if you’ve struggled to pay back a debt in the past, in the lender’s eyes you’re more likely to do so again, and so their appetite to lend to you decreases.
That means getting a business loan when you have a poor credit file is about finding ways to diminish the lender’s risk and make them feel more comfortable with lending to you.
County Court Judgments are one of the better-known causes of bad credit, and lenders will normally look at how many you’ve had, their value, and their frequency.
Winding up orders
If you’ve been subject to a winding up order, even if it was rejected, this is likely to affect any finance application. Like CCJs, winding orders demonstrate that creditors have taken legal action against you in the past.
Lenders often look into public data such as filed accounts when assessing whether they will lend to your business. If you display low levels of working capital in your business or have ridden out a tough period recently, it could be a red flag.
Even if your business is doing well, if you share a director with a failed or underperforming business this could hurt your case. However, doubts about directors can sometimes be balanced using a personal guarantee (more on those in a moment).
How can you get a business loan with bad credit?
As I mentioned above, your best course of action will most likely involve using more creative forms of security. With poor credit, you’re fairly unlikely to get unsecured funding, but luckily there are a variety of ways you can get a business loan with bad credit:
Perhaps the best-known way to assuage any doubts about your business is to offer a personal guarantee to the lender. This is your own commitment to repay the money if your business can’t — which might involve your personal assets, and is not a decision to be taken lightly.
However, if you’re confident about your business plans and have some personal capital to back that feeling up, offering a personal guarantee might make the difference.
If your business owns a valuable asset like a vehicle or machinery, there are various forms of asset finance that allow you to release the value in it, or use it as security for a loan. In this way, the lender knows the loan is backed up by a physical asset that they can take a legal charge over and sell if things don’t go to plan.
For businesses with distress in their past, invoice factoring can be a great route to funding. If your business is operating well and has debt owed to it in the form of invoices, factoring releases most of this value immediately. You’ll normally get credit control services included too.
These are just a few of the ways you can mitigate a tricky credit history when applying for finance — the one that works for you and the lender will depend on the specifics of your past and your business profile.
The golden rule is to always be honest and up-front about difficulties you’ve had — because hiding something can often just prolong the process leading up to a ‘no’.
But by using security or perhaps offering a personal guarantee, many businesses will find that after all, it is possible to get a business loan with bad credit.
Conrad Ford is chief executive of Funding Options.