While a good credit score certainly helps your ability to find a business loan, a range of finance providers exist to cater for those who don’t.
In this article we’re going to explore the subject of obtaining business finance with an imperfect credit score, as well as making recommendations on how best to secure the loan you need.
Applying for a Small Business Loan
In the old days, banks would focus very closely on your credit score as the fundamental criteria for eligibility. Some alternative finance providers take a broader view, however, by looking at a range of factors including:
- Your business turnover
- How long you’ve been trading
- What assets you may have as loan collateral
- Whether you can offer a ‘personal guarantee’ or guarantor
What Counts as Bad Credit?
Most lenders will use credit scoring software such as Experian, which relies on public data around borrowing history, financial associations, and a list of company directors from Companies House. The key issue they’ll be looking out for relates to missed payments or debtor actions such as a County Court Judgement.
In most cases, the personal credit scores of the business owner or company directors will also be scrutinised, as it is supposed that individual relationships with money could affect the running of a business.
Bad Credit Business Loans May be More Expensive
All financial providers are measuring risk Vs. reward when they lend money. Where they perceive higher risk, as in lending money to a business or individual with a poor credit history, they will increase the lending rates in counterbalance.
Where the business has a clear growth strategy, or necessary asset purchase in mind that’s going to increase overall profitability, this can work fine. But directors should think carefully about the long-term viability of a business before they seek finance.
Directors Personal Guarantees
For business loans of a certain size, some kind of collateral is going to be required to stand as loan security. This gives the lenders the security to know that, even if the business fails, they are going to get their money back.
Traditionally, this would be a business asset of some kind – such as a premises – but where the business has no collateral the lender will insist on a ‘personal guarantee.’ This allows a member of the company – usually a director – to use a personal asset, such as a family home, as a guarantee for the business loan.
While the personal guarantee can be useful, they should be thought through very carefully before signing. If a limited company fails, the law allows directors ‘limited liability’ by dint of company law. This means that by making a company insolvent you write off the debts and start again. Where a personal guarantee has been signed, however, the ramifications may be much more serious. Financial providers with a charge over a family home can force the sale meaning directors suddenly find their family lives substantially impacted by the business failure.
Starting a Business with Bad Credit
For new businesses, lacking the trading history or business assets that could compensate for imperfect credit, it can be even harder to find business finance.
In this situation, there are a number of special organisations in place to facilitate finance for startups. As an example, the governments Enterprise Financial Guarantee Scheme helps small businesses by acting as guarantor for businesses without the means to do so themselves. This can be a fantastic way to get the capital needed for business growth and is provided by the government to nurture entrepreneurship across the UK.