Whether your established business has a poor credit history or you're trying to start a business with a poor personal credit history, obtaining finance can be incredibly tough. A credit check is one of the first tests applied to prospective borrowers by most lenders and failure often leads to automatic disqualification. Nevertheless some lenders do provide loans to businesses with bad credit ratings and the additional good news is that if you choose the right kind of loan, then you can repair your credit score.
Should you take out a loan if you have a poor credit rating?
The poor credit rating of a person or business can be due to a number of factors e.g. defaulting on debt repayments in the recent past or a high debt to income ratio. You can even have a 'bad' credit history due to having never used a credit facility in the past. The only way to repair a poor credit rating is to build up a record of having successfully repaid your debts, so the short answer to the above question is 'yes'.
However, if your projected future earnings mean that you wouldn't be able to make repayments on the loan, leading to further defaults and even potential bankruptcy, then the answer is a resounding 'no!' This sounds obvious but in the case of a business taking out a loan to cover a cashflow shortage the situation might not be as clear as it first appears. If a proper analysis of your situation reveals that you would in fact be financing losses then a careful reassessment of your business plan is in order, not a quick-fix solution.
Loan options for businesses with a bad credit history
Unfortunately most high street banks fall into the category of lenders who'll automatically refuse a loan application when checks reveal a poor credit rating. But that doesn't mean your regular business bank shouldn't be your first port of call, especially if you have a good relationship with them. Banks generally still offer the best available interest rates and if you're prepared to offer additional security (e.g. securing the loan against your home) then this could be the cheapest way to obtain a business loan.
If you've already been refused credit by your bank don't despair. A growing number of boutique business lenders such as Boost Capital and Ortus Business Finance who'll make a judgement about whether to loan your business money on a case-by-case basis according the overall health of the business. You won't be able to borrow at the same rate as a company with a good credit rating, but paying back the loan on schedule can help to repair your credit history.
In the UK there are a large number of government schemes aimed at providing more finance to small and medium sized businesses. Under these schemes the government is effectively acting as a guarantor to a loan from a bank or non-profit lender. You can search the UK government website for national and regional initiatives for which you might be eligible.
Alternatives to business loans
When a traditional loan simply isn't an option you may need to consider alternative finance options. These routes are often more expensive than a bank loan so you should try to use options that will help repair your credit history and reduce your cost of finance in the long-term.
Invoice finance is a way of borrowing the money tied up in your unpaid invoices. Typically you can be advanced up to 95% of the amount you're owed, with the balance paid when your customers pay. There are almost always fees for using such a service, on top of interest charges, but it does involve a credit agreement and so can help repair your rating.
Crowdlending platforms like FundingTree help you raise loans piecemeal from individual investors who are attracted to your pitch. Again a credit agreement is involved so you can repair your credit history as you repay. But interest rates are high, fees are involved and you'll need to put quite a bit of effort into promoting your pitch.
Revenue advance facilities are loans which are repaid from a percentage of your future revenues, which means it's almost impossible to default on payments. As such, these loans are available to borrowers with poor credit histories - at a fairly high rate of interest. You'll be able to borrow one or two times your monthly sales figures.
Loans from friends and family are often all that's available in the way of finance to small businesses and startups with poor credit ratings. While such loans are often agreed at a relatively low rate of interest, repaying them won't improve your credit score. You should also take great care to draw up a formal loan agreement to bitter disputes further down the road.
Our tips for businesses with bad credit ratings
- Seek advice from an independent financial adviser: Before you take out a loan you need to be sure that it's the right move for your company. An independent financial adviser will help you determine whether a loan will help your business succeed or further damage its financial health.
- Challenge any errors on your credit history: Request your credit history from one of the three main reference agencies (Experian, Equifax, Callcredit) and raise a dispute over any inaccuracies via the same agency.
- Take steps to repair your credit score before applying for loans: There are some quick and easy steps you can take to improve your credit score. One example is utilising your unused credit cards. By paying for some items on a credit card and making payments on time you'll help to repair your rating (but don't use more than about 30% of your available balance). You can also negotiate with your creditors, asking them to remove bad marks against you in return, for example, for settling your outstanding balance early.
Ultimately your cost of finance will only come down if you can repair your credit history, so make this a top priority.