Bad credit can make life difficult for business owners, especially when it comes to securing business financing. Fortunately, there are ways to access business loans even with a poor credit history, or no credit history at all. You just need to know your options:
Get a Bad Credit Business Loan
A bad credit business loan works much like a standard business loan – with access to a lump sum that must be repaid over a set period of time – but it’s offered specifically to borrowers with less than ideal credit. Most high street lenders have a minimum credit threshold, so bad credit loans are offered by alternative lenders, including many online lenders. They are available to borrowers with poor to average credit, and are usually capped at a maximum loan amount of £50,000.
Bad credit lenders provide a vital avenue to funding for businesses that are turned away from mainstream lenders, but it’s important to know that bad credit business loans have higher interest rates than other types of business loan. This is because the lender off-sets their higher risk in lending to a bad credit business by charging more. And because higher interest equals larger loan repayments, it can be easier for borrowers to fall behind on their loan repayments and further harm their credit. So it’s crucial you understand the full cost of a bad credit business loan, and are sure your business can meet these costs, before pursuing this option.
Provide Loan Security
Lenders use credit score to determine how reliable a borrower is, and how likely they are to make their repayments; the higher the borrower’s score, the lower the perceived risk to the lender. Providing collateral (or “security”) for a loan is another way to lower a lender’s risk; collateral can be seized in lieu of loan repayment in the event a borrower defaults on their loan – so the lender is not left with nothing. Providing collateral makes it easier to qualify for a loan, and to access lower interest rates; this is true for all borrowers, but can be especially powerful for poor credit borrowers who are struggling to qualify for a loan.
So if your business has a valuable asset, such as property or equipment, you may be able to use it as collateral for a business loan. And a secured bad credit loan will have a lower interest rate than an unsecured bad credit loan, so it’s a cheaper option. However, if you fail to make your loan repayments, the business asset you have used as collateral is at risk of being seized, leaving you with nothing.
Find a Guarantor
Another way to lower a lender’s risk in lending to a bad credit business is to use a loan guarantor. If your business has poor credit, but has a relationship with a business or individual with good credit, then having the good credit borrower co-sign your business loan will provide the lender with an extra level of protection. In the event your business fails to make its loan repayments, the guarantor is on the hook for them. Again, by lowering the lender’s risk in lending to you, it will be easier to access loans, and interest rates will be lower than with an unsecured, unguaranteed bad credit loan.
Consider Alternative Forms of Financing
All of the above is true for business loans that rely on credit score, but not all forms of business financing do. Alternative financing options are available to all businesses, but they can be especially helpful to businesses with poor credit, no history, intermittent cash flow, or other characteristic that makes qualifying for a traditional loan difficult.
Some alternative forms of financing are more expensive than traditional business loans, but this is not always the case, and borrowing amounts from hundreds to hundreds of thousands of pounds are available. In addition, alternative forms of financing can provide significantly more flexibility than a business loan. So consider whether any of the following would fulfill your business’s financing needs:
- Merchant cash advance
- Peer-to-peer loan
- Private funding
- No credit check loan
- Government loan
Just remember that the key to finding the right, most affordable option for your business is to shop around. Even businesses with bad credit have multiple options, so find the one most suitable for your needs and circumstances.
Take Steps to Improve Your Credit
Good credit is a signal of financial health, and it’s important to take steps to improve and maintain your business’s credit score. Some of these steps can have an immediate impact, thus increasing your chances of getting a business loan. Such steps include:
- Paying off existing debts
- Closing inactive business accounts
- Reviewing your credit report and identifying/correcting any errors
- Limiting new credit applications
Other, longer-term steps to improve credit include:
- Maintaining a healthy cash flow
- Utilising a mix of credit types
- Paying all bills on time
- Keeping your business accounts in good order
If your business needs access to affordable financing today, without the hassle of a credit check, talk to Swiftfund. We can help you with convenient, flexible cash in just a few days!