If you have bad credit history and are trying to run a business, or set up one, your financial history may be giving you cause for concern in terms of your ability to gain access to credit in the future. You may even be worried it will not even be possible to access a loan with a bad credit score, or are stressed that there is ultimately nothing that you can do to improve it. However, on both counts, that is simply not the case since there are ways on how to improve your business credit.
Bad credit loans
You may find it difficult with a bad credit score to qualify for the standard business loan with a traditional bank or building society. However, there are a number of different lending providers who provide specialist products in the form of bad credit loans.
Typically, this type of product is unsecured (ie. you do not have to provide collateral in the form of property or other high-value possessions) but they do tend to have higher interest rates than secured loans, in order to balance the risk involved in lending to you. When assessing your application they may take into account the following factors:
- Reputation of your company
- How well the business is currently performing
- How trustworthy you are as a business owner
- Customer reviews
Some products may require personal guarantees from another company director. This is where a person with a good credit record or income is willing to back up any payments in the main borrower defaults. It gives the lender peace of mind knowing that they may be able to recoup their losses if need be. Those struggling to find guarantees can request no guarantor loans.
Start up loans
Another option for you if you are trying to access a business loan with poor credit is getting a Start Up loan. Set up by the UK government in 2012, this initiative provides personal loans up to the value of £25,000, as well also providing business support and mentoring, all with the aim of helping both start-ups and early stages business to get going when they may have otherwise been refused funding elsewhere (through traditional lenders).
In order to be eligible, your business needs to have been trading for less than 24 months in total, the loan itself must only be used for business means, and you will need to fit into one of the government approved business type categories too. It will also be a requirement for you as a business owner to provide a business plan, personal budget as well as a cash flow forecast prior to your application being approved.
A viable alternative to applying for a business loan, you receive up to 80 to 90% of your unpaid invoices upfront. This is a great option for those with a bad credit score, as your application is assessed based on what you are due on invoices, as opposed to your credit history.
It can also be advantageous if your business is in a sector where payments can be long overdue such as fashion, retail or catering and it can help you maintain cash flow in the meantime whilst waiting for the invoice to come through.
Credit scores are not taken into account because the invoice finance industry is not regulated by the FCA.
Business cash advance
Again, another alternative form of business funding is a business cash advance, in which a designated amount is borrowed upfront, and then you agree to repay through a specified percentage of your customer card sales. In summary, the lender is essentially purchasing a portion of your business’s future card sales.
Much like invoice financing, this type of funding can be advantageous for those with bad credit, as the decision to grant you credit is weighed more heavily towards your company’s potential earnings, as opposed to your own personal credit history. Nevertheless, you should be aware that lenders who provide business cash advance do tend to provide high interest rates.