Many lenders will utilise credit scores to determine how reliable you are to lend money to; therefore, it’s really important to have as high a score as possible.
If you don’t have a good score, you may find yourself restricted when it comes to finding the right loan. However, if your score is low, it doesn’t mean you’re out of luck. Fortunately, there are a few alternative options on the market that could provide you with what you need.
Below, we identify how you can get a business loan, even with bad credit.
What is bad credit?
To begin, consider what it actually means to have bad credit. It essentially means that a business or individual is predicted to be less likely to repay debt on time and in full, based on a previous history of debt repayments and personal finance information. This is called your credit history, and as you know, you can look this up to see where yours stands.
If you have ever used a credit card, taken out a loan or paid bills in instalments then you will have a credit history. The information is thorough and will show the total debt of the individual or business, the length of the credit history, frequency of repayments and also promptness of payments being made on time. The lower the credit score, the higher risk you are to a lender. That’s why a good credit score will improve your ability to secure lending.
However, more lenders are becoming open to this ‘risk’, offering solutions that can support businesses even if their credit score is lacklustre.
Looking into risks
You may find that smaller, often online lenders are more open to risk and might accept you. But this often comes with costly consequences which in turn, could get you into more credit trouble. Due to the nature of lending to a business with bad credit scores, these lenders offer smaller loans coupled with a high interest rate and possibly a shorter repayment period. These may be unsecured i.e. not backed up with any security over the business, however they may require directors personal guarantees.
Another option which has slightly less risk is known as a secured business loan. This is when the lender requires security in the form of security from the business – this could involved security over a physical asset, such as business equipment or property, or a debenture over the businesses’s assets. If you fail to repay the loan to the agreed terms, the lender has the right to step in and use those assets to satisfy its loan.
Finally, you could look into guarantor business loans. If you’re a small business with a bad credit score looking for a loan, this could be an option. A guarantor business loans requires someone you know and trust to co-sign the loan agreement, making them a guarantor. This person is signing to say that if you fail to repay the loan, they will make the payments on your behalf until all debts are repaid.
It’s also crucial you have a full understanding of the terms you are accepting to protect yourself and minimise risks when agreeing to a personal guarantee. There is personal guarantee insurance available to protect yourself if you are required to take on this type of risk.
Have you considered equity instead?
While can you get a business loan with bad credit, as outlined above, there are a number of risks. Another way to finance your business is through equity funding. This is where investors buy a stake in your business, giving you cash in return for shares. This cash does not need to be paid back and it also serves you well as investors don’t have a right to interest or capital repayments. For investors, it’s a long-term investment and which they may want to cash out or sell in the future at hopefully more than they paid for them. They are however entitled to dividends.
The advantage of equity funding over a small business loan is that the money doesn’t have to be paid back. It’s definitely an option when other funding avenues aren’t looking feasible due to too small loans or high interest, however it isn’t necessarily available to every business. Businesses with high growth potentials and turnaround situations are most likely to secure investors.
How to improve your credit score
While you can go down the equity financing route, or take out a loan, ultimately, you really need to improve the credit score of your business to make future access to finance easier. You don’t need to be at 75 out of 100, you just need to be towards the top end, and out of the bottom quarter in order for other businesses to be comfortable working with you. Here are a few tips on how to improve your credit score over time:
Pay bills on time
It might be a no brainer, but even paying bills a week late can have an impact on your credit rating. Be organised, set up an accounting system so that you’re always aware of what is coming in, and what is going out.
Communication is key
If your business is going through a turbulent period and it is affecting your ability to pay bills, don’t just bury your head in the sand. Get on the phone and call the vendors to explain your situation. If you’re honest about why you are running behind and when you will be able to make the payments, the vendor is far less likely to report you to a credit scoring company.
Don’t borrow more than you can afford
One of the most significant threats to your credit score is debt. If you miss payments, it will have a harmful impact, as well as damaging your business cash flow. Due to this, it’s essential only to commit to payments you know you can afford – whether it is loan repayments, supplier contracts or other expenses.
By staying within your financial means, you can allow your financial commitments to be met regularly and reliably, preventing a downfall to your credit score.
As we have stated above, it is still possibly to get a business loan even with bad credit. While it can seem like an uphill battle, there is plenty of help out there. You just need to understand what the alternative options are and find one that works best for your company.
If you are seeking finance for your business, but are unsure what options are available for you with your credit score, we can help. Our advisors can discuss your unique situation and come up with worthy solutions.
Get in touch today.