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 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 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 1 or 2, and definitely the credit record of any individual offering a personal guarantee.
Ultimately, each lender has its 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.
What is considered “bad credit”?
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 can 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 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.
Bottom line
Whilst it may be more challenging for people with bad credit to get a business loan, it’s not impossible. It’s worth bearing in mind that some banks may ask for collateral or a personal guarantee as an alternative to not having a good credit score or the cleanest borrowing history. Lenders could also increase the interest rates of the product.
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Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
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Chris has written 612 Finder guides across topics including:
You can’t really avoid credit checks when applying for a business loan, but we’ve put together a series of strategies to boost your chances of being approved even if your credit score isn’t great.
If you run a small business and need to borrow money, you may be asked to give a personal guarantee. We’ve looked at how it works and what risks it carries.
Although you may be able to get a personal loan to start or grow a small business, most lenders state that their personal loans cannot be used for this purpose.
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