You’re probably already aware that companies have credit files too. So how do you get the most competitive loan rate available to you if your business or personal credit record has taken a few knocks along the way?
Much like consumer lending, business lending is getting better at catering to “non-standard” (read “bad credit”) borrowers. In days on gone by, if your bank said “no”, that might have been the end of the line. Thankfully, these days there are plenty of innovative specialist lenders around. These lenders use smarter approval algorithms and underwriting processes, which let them access previously untapped sectors of the market, without having to lend irresponsibly.
Whose credit record matters: my own or my company’s?
Both, but which is more significant can depend on the type of company the loan is for.
If you’re a sole trader. Sole-traders are solely responsible for a business, and because of this, in the eyes of a lender, your personal credit record is just as important as the business’s.
If it’s a partnership. Lenders will want to search the credit files of the partners (since they’ll be making the big decisions for the firm) and of the business as a whole.
If it’s a limited company. Lenders will pull the company’s credit record, but may also be interested in the credit records of the directors, particularly if there’s only one or two, and definitely the credit record of any individual offering a personal guarantee.
Ultimately, each lender has it’s own approval systems and lending criteria, and they can even vary over time.
One lender might want you and your firm to tick all the boxes. Another lender might be happy to lend to somebody with bad personal credit, if it can see that their company is clearly moving in the right direction, for example.
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Individuals and companies don’t have one single, definitive credit score. Different credit reference agencies (CRAs) – the firms that track and report borrowing behaviours – use different scoring systems. However, if you have bad credit in one CRA’s eyes, there’s a strong likelihood you’ll have bad credit in all CRAs’ eyes.
“Bad” credit can come about through late repayments on credit agreements, or simply through not having much of a track record of using credit products.
A credit score is just one of a number of factors that lenders look at when they’re weighing up whether or not to approve an application. In fact, what’s probably more important is how affordable the loan would be for your business, taking into account its past, present and projected income and outgoings.
With good credit, provided you meet their various criteria, most lenders will be delighted to lend you money. With bad credit, some won’t.
How can I get approved for a business loan with bad credit?
Here are some steps you could take to boost your chances of getting your application across the line:
Consider a specialist lender. Plenty of lenders aren’t looking for credit perfection, but they will need to see that your company is growing and can afford the loan.
Consider a loan matching service. A good loan matching service will be able to check a large range of lenders in minutes, and use soft searching (credit checks that don’t hurt your credit score) to only suggest those that you have a decent chance of success with.
Start small. The larger the loan, the more a lender has to lose. You might have to apply for a smaller loan amount than you’d ideally like.
Weigh up what loan term to apply for. The longer the loan term, the greater the window of opportunity for something to go wrong (at least, that’s how a lender might see it). However, shorter loan terms usually mean higher monthly instalments, potentially making your loan less affordable. Aim for the shortest loan possible that’s comfortably affordable.
Consider offering security. Using an asset or a personal guarantee as security can mitigate some of the risk for a lender.
Work on your credit file. Get visibility of your credit report, fix any mistakes it contains and work to improve your score by building up a history of using credit responsibly.
Some popular options involving security
Unlock the value in your invoices to move your business forwards. Compare a panel of lenders through our partner Funding Options.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
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