A poor credit rating can affect your ability to get a business loan from mainstream lenders such as banks. There are alternative ways to secure a business loan and repair your bad credit so future funding is easier to find.
While bad credit business loans and funding alternatives are possible, it’s best to start with repairing any bad credit rating first. Don’t know your credit rating? You’re not alone. YouGov research suggests that only a quarter of people in the UK know what their credit rating is, while almost half have never checked their credit report.
Many small businesses would appear to be even more in the dark when it comes to their credit rating. A 2014 ComRes survey suggested that 59% of small UK firms had never checked their credit score. And, of those that had, 56% hadn’t done so within six months. Only 13% of respondents could correctly identify all key factors that can influence a business’s credit rating.
Not knowing that your business credit rating is poor can lead to unpleasant surprises when your business loan application is unsuccessful. This can leave you unable to invest in growing your business or to weather a short-term cash flow issue. Moreover, a new supplier may not grant you credit.
How credit scores are created and used
A credit score gives a numeric value to the creditworthiness of a person or business, guided by their credit history. The higher your credit score, the greater chance that your business loan will be approved.
Credit information is gathered and held by credit reference agencies (CRA), and in the UK there are three – Experian, Equifax and TransUnion. A lender requests your credit report and rating when your business applies for a credit card, loan, mortgage, vehicle finance, mobile phone contract or monthly payment arrangement for insurance, utilities and rent. Then they can decide whether to grant you credit, and if so, how much and on what terms.
Lenders also send credit information to CRAs. Other important information including whether you’ve ever been made bankrupt or have County Court Judgments against you or your business is also included in your credit report. Credit reports are updated every month and data is held for six years. CRAs have different numerical scales. Experian’s top score is 999 and any score between 881-960 is considered a good score, while it’s 710 for TransUnion and 700 for Equifax where 420-465 is good and anything higher than 466 is excellent.
What affects my business’s credit score?
Your business’s credit rating is calculated by taking into account numerous factors including:
- Business County Court Judgements – CRAs will look at how many you have and their value when assessing your eligibility for credit.
- Winding up orders – Being subject to a winding up order in the past can affect business finance applications.
- Financial performance – CRAs look at public data about your company to determine your net worth and whether your business holds a healthy amount of cash.
- Directors’ history – If the business’s senior management have a personal history of Individual Voluntary Arrangement (IVAs), debt management plans or have been associated with other failing businesses, securing a business loan may be difficult.
Know your credit rating
Before applying for a business loan, first check your credit score with all three UK CRAs. It’s free to find out your credit score, although you may have to pay to access your credit report. A free one-month trial subscription may be available.
Premium services can be purchased. Businesses can use My Business Profile from Experian which includes a free one-month trial, then £24.99 plus VAT a month to access their full business credit report and credit score in real-time. Or you can fill out a business report application form and email it to Equifax. There are other service providers, including checkmyfile which claims to be the UK’s only multi-agency credit report. It includes information from all three UK CRAs and is free to use for 30 days, then costs £14.99 a month.
Alternatively, visit the Money Advice Service website for more information about checking credit scores and reports.
Where to find bad credit business loans
If your business suffers from a bad credit score, you may struggle to acquire loans from traditional lenders such as banks or you may get less credit than you want and pay more in fees and interest.
Instead, you may need to look for bad credit business loans and alternative sources of funding. Various lenders now offer bad credit business loans, especially to businesses with good turnover or valuable assets. The criteria for and terms of bad credit business loans vary, but they can be an option for businesses and owners with bad/poor credit scores/ratings.
However, the interest and fees can be significantly greater. So, if you go for a bad credit business loan, identify the best options open to you and find out exactly how much you’ll have to repay. Finding out the annual percentage rate (APR) of all bad credit business loans you’re offered can enable you to properly compare borrowing costs. Factor in all costs, fees and interest.
Before signing up to a bad credit business loan, seek advice from an accountant, so you know the costs and likely impact on your cash flow. Some bad credit business loans require lenders to have a guarantor, while others don’t, but these are usually more expensive. Having good turnover or valuable business assets can make it easier to get a bad credit business loan.
Here are some other funding options:
- Start-up loan – If you’re starting up and therefore have no trading history, you may be able to get a loan from The Start Up Loans Company. There will be a credit check and money will not be lent to those filing for or currently bankrupt or on a Debt Relief Order or those with an outstanding IVA or Trust Deed, on Debt Management Programs or Debt Arrangement Schemes (DAS).
- Secured loan – If your business owns assets such as commercial property, vehicles, machinery, equipment or technology, you can obtain a business loan secured against these. Secured loans are often cheaper as there is less risk for the lender.
- Government grants – The government helps new and small business with funding without any expectation of repayment so bad credit isn’t a problem. Grants come in many forms from cash to free equipment. Government website gov.uk details sources of grants, loans and support available to small businesses. Applying for a grant is a time-consuming and complex process, and there may be restrictions on how you can use the grant.
- Business cash advance – A lender may be prepared to lend money on the expectation that repayment comes directly from future sales. As this effectively sells future sales to the lender at a discount, a bad credit score won’t count against you as it would with a traditional loan.
- Guarantor loan – With the support of a guarantor, you may be able to borrow up to £15,000. In most cases, a guarantor will be a family member or friend who is happy to assume responsibility for your loan should you be unable to make payments.
- Equity crowdfunding – Raising money from many lenders who each contribute relatively small amounts is another option for startups and small businesses looking for working capital. There’s no expectation of repayment on the business’s part although investors will have equity in your business.
Further options includes peer-to-peer lending via platforms such as Funding Circle. The Alternative Business Funding website can help you to find other sources of business finance, even if you have credit issues.
Repair your credit score
The best way to avoid bad credit business loans and have more choice when it comes to future funding is to repair your credit history. Here are some tips for improving your business credit rating.
- Check your credit rating regularly and correct any inaccuracies straightaway. Address errors with the lender or CRA – Experian, Equifax and TransUnion all offer guidance on this. Mistakes can only be corrected with the lender’s authority and requests are normally dealt with within 30 days.
- Pay bills promptly. Making late payments can impact your credit rating if your creditors resort to legal action to recover outstanding payments.
- Establish good credit relationships with suppliers. If using trade credit, boost your business credit score with positive payments on your file.
- Don’t automatically close credit accounts when they’re paid off unless you have to pay for them. While it sounds odd, closing these accounts can have an adverse effect on your business credit rating which, in turn, may, limit the amount of credit you can obtain.
- Having no credit makes it impossible to judge risk, which can give you a poor credit score/rating.
- Already having credit will help you take on more, but it’s best not to overdo it. Keep your debts and repayments manageable so you can continue a line of business credit.
- Avoid County Court Judgments and IVAs.