Business owners with a less-than-perfect credit scores often wonder whether obtaining a business loan is still possible.

The reality is that having imperfect credit can make it trickier to secure finance, but it doesn’t necessarily mean that it’s not possible.

This article aims to provide information on what options are available to you and the steps you can take to improve your chances.

We will also explore the impact of bad credit on the loan application process and what alternative lending options might be an option.

How to Secure a Bad Credit Business Loan in the UK

Here are some tips on how to secure a bad credit business loan in the UK:

  1. Understand Your Credit Score: This will help you identify and address any factors that may impact your creditworthiness.
  2. Research Lenders: Since commercial lending is unregulated, you’ll need to be careful about who you sign up with.
  3. Prepare a Solid Business Plan: A well-crafted business plan can help demonstrate your business’s viability and increase your chances of approval. Any plan should include financial projections, a marketing strategy, and a clear loan use outline.
  4. Consider Alternative Financing Options: Bad credit business loans often come with higher interest rates and fees, so it’s worth exploring invoice financing, merchant cash advances, or crowdfunding as alternatives.
  5. Collateral is usually Required: Offering collateral can help reduce the lender’s risk and increase your chances of approval. This could include property, equipment, or inventory.
  6. Be Transparent: Honesty is always the best policy. Be upfront with your lender about your credit history and any other financial difficulties your business may be facing.

Top UK Lenders for Bad Credit Business Loans: A Comparison

Here’s a comparison of the top UK lenders for bad credit business loans:

  1. Liberis: Liberis offers unsecured business loans of up to £500,000 to UK businesses with poor credit scores. The lender uses a unique revenue-based financing model that allows businesses to repay the loan through a percentage of their daily sales.
  2. Funding Circle: Funding Circle is a peer-to-peer lending platform that offers business loans of up to £500,000 to UK businesses with bad credit. The lender uses a variety of data sources to assess creditworthiness, including credit scores, cash flow, and business performance.
  3. Nucleus Commercial Finance: Nucleus Commercial Finance offers secured and unsecured business loans of up to £50 million to UK businesses with poor credit scores. The lender uses a range of assets as collateral, including property, machinery, and stock.
  4. Boost Capital: Boost Capital offers unsecured business loans of up to £500,000 to UK businesses with bad credit. The lender uses a revenue-based financing model and assesses creditworthiness based on business performance rather than credit scores.
  5. iwoca: iwoca offers unsecured business loans of up to £250,000 to UK businesses with poor credit scores. The lender uses a range of data sources to assess creditworthiness, including cash flow, business performance, and customer feedback.
  6. Fleximize: Fleximize offers secured and unsecured business loans of up to £500,000 to UK businesses with bad credit. The lender uses a range of assets as collateral, including property, equipment, and invoices.
  7. Tide Business Loans – Tide offers unsecured loans of up to £500,000 to UK businesses, including those with poor credit scores. They use a range of data sources to assess creditworthiness, including business transactions and financial history.

Pros and Cons of Bad Credit Business Loans

Pros

  1. Access to Financing that may not be available from traditional lenders.
  2. Opportunity to Rebuild Credit
  3. Flexible Repayment Terms

Cons

  1. Higher Interest Rates
  2. Risk of Default
  3. Limited Loan Amounts
  4. Usually requires collateral

Understanding the Impact of a Credit Score on Business Loan Eligibility

A bad credit score can significantly impact a business’s eligibility for a loan.

Lenders use credit scores to evaluate a borrower’s creditworthiness and determine the level of risk. A low credit score can indicate a higher level of risk, which may lead lenders to reject a loan application or offer less favourable terms and higher interest rates.

Bad credit can also affect a business’s ability to secure traditional forms of financing, such as bank loans or lines of credit. Banks and other traditional lenders often have strict credit requirements and may only approve loans for borrowers with a good score.

Moreover, bad credit can also impact a business’s ability to secure other forms of financing, such as leasing equipment or obtaining a supplier credit line.

Read our full article on How to Check a Business Credit Score

What Counts as Bad Credit?

Most lenders will use credit scoring software such as Experian, which relies on public data about 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 consider a business’s long-term viability carefully before seeking finance.

How Much do Bad Credit Business Loans Cost?

Bad credit business loans can come with higher costs than traditional loans for businesses with good credit. Some of the costs that may be associated with bad credit business loans include:

  1. Higher Interest Rates: Lenders may consider businesses with bad credit a higher risk, which may result in higher interest rates on loans. This can make it more expensive to borrow money and increase the overall cost of the loan.
  2. Fees: Some bad credit business loans may come with additional fees such as origination, application, or prepayment penalties. These fees can add to the overall cost of the loan and make it more expensive.
  3. Shorter Repayment Terms: Some bad credit business loans may have shorter repayment terms, which can increase the monthly payments and the overall cost of the loan.
  4. Collateral Requirements: Some lenders may require collateral, such as property or equipment, to secure the loan. If a business owner cannot repay the loan, the lender may seize the collateral as payment.
  5. Limited Amount: Business owners with bad credit may not be able to borrow as much money as they need or may only be approved for a smaller loan than requested.

What Security Do I need to secure a bad credit business loan?

The type of security that may be required to secure a bad credit business loan can vary depending on the lender and the loan product. Some lenders may require collateral, while others may not.

  1. Collateral: Collateral is a type of security that a lender can seize if the borrower defaults on the loan. Common types of collateral for business loans include real estate, equipment, inventory, and accounts receivable.
  2. Personal Guarantee: A personal guarantee is a promise by the business owner or another individual to repay the loan if the business cannot do so. A personal guarantee is a common requirement for bad credit loans.

What to Consider Before Taking Out a Bad Credit Business Loan in the UK

Wr recommend you consider the following factors while researching your loan:

  1. Interest Rates and Fees: Bad credit business loans often come with higher interest rates and fees than traditional loans, increasing the cost of borrowing. Make sure you understand the interest rates and fees associated with the loan before accepting it.
  2. Repayment Terms: Bad credit business loans may come with shorter repayment terms or revenue-based financing models, which can make it easier to manage cash flow. However, these repayment terms may also come with higher monthly payments or balloon payments at the end of the loan term.
  3. Loan Amounts: Bad credit business loans may come with lower loan amounts than traditional loans, which can limit the amount of financing available to your business.
  4. Lender Reputation: It’s important to research the lender’s reputation and read reviews from other customers before applying for a bad credit business loan. Make sure the lender is reputable and has a track record of providing quality customer service.
  5. Alternative Financing Options: Bad credit business loans are not the only financing option available to UK businesses with poor credit scores. Consider alternative financing options, such as invoice financing, merchant cash advances, or crowdfunding, which may be more suitable for your business.
  6. Business Goals: Consider whether taking out a bad credit business loan aligns with your business goals and long-term financial plans. Will the loan help you achieve your business goals or lead to unnecessary debt?

How much longer could it take to secure finance with bad credit?

Securing a business loan with bad credit can often take longer than securing one with a good credit history. The exact time it takes can vary greatly depending on a number of factors, including the nature of the loan, the lender’s processes, and the specific circumstances of your business.

The key reason for this extended timeframe is the additional scrutiny that lenders apply to applications from businesses with bad credit. Lenders need to carefully assess the risk associated with granting a loan to businesses with a poor credit history. This can involve more in-depth financial checks, a detailed review of the business’s financial statements, and potentially even meetings or interviews with the business owner.

Another contributing factor is the potential need for collateral or a personal guarantee to secure the loan. Arranging for this collateral can take time, especially if it involves getting property or other assets valued.

You might also spend more time searching for and negotiating with potential lenders. Not all lenders are willing to provide loans to businesses with bad credit, and those that do may offer varying terms and conditions. This requires you to take the time to research and compare various lending options to find the one that best suits your business’s needs and financial situation.

What’s the Role of Brokers and Advisors in Obtain Adverse Credit Loans?

In our opinion, brokers and advisors can play an essential role in making the process smoother and more successful. These professionals provide valuable services that can save you time, reduce stress, and potentially improve your chances of securing suitable finance.

1. Expert Knowledge: Brokers and advisors deeply understand the financial market, including which lenders are more likely to approve loans for businesses with bad credit. They can recommend suitable options you might not have found alone.

2. Access to a Wider Range of Lenders: Brokers often have relationships with a broad network of lenders, including those that don’t directly deal with the public. These connections can give you access to more potential loan sources.

3. Negotiating Power: Brokers and advisors are experienced negotiators. They can work on your behalf to secure more favourable loan terms and conditions, such as lower interest rates or longer repayment periods.

4. Time and Effort Saving: Applying for a business loan can be time-consuming, especially when you have bad credit and may need to approach multiple lenders. A broker can handle much of this workload, leaving you free to focus on running your business.

5. Advice and Guidance: Advisors can provide strategic advice on how to improve your chances of securing a loan. This could involve suggestions for improving your credit score, advice on how to present your business plan, or guidance on what type of loan would best suit your needs.

6. Preparation of Documentation: Brokers can assist in preparing and presenting your loan application and financial documents to maximise your chances of approval.

7. Credit Score Impact: When you apply for a loan, lenders run a hard credit check, which can lower your credit score. Brokers can help by getting pre-approvals or rate quotes with soft credit checks, which don’t affect your credit score.

Risks and Consequences of Bad Credit Business Loans

Like all forms of credit, bad credit business loans come with certain risks and potential consequences. Understanding these can help you decide whether such a loan is right for your business.

1. Higher Interest Rates: Lenders often charge higher interest rates to businesses with bad credit to offset the increased risk they’re taking on. This can make the loan significantly more expensive over time.

2. Collateral Loss: If you secure your loan with collateral and fail to repay, the lender may seize your collateral. This could be property, equipment, or other business assets.

3. Strained Cash Flow: The higher repayment amounts associated with bad credit loans could strain your business’s cash flow, potentially leading to further financial difficulties.

4. Impact on Credit Score: If you’re unable to keep up with repayments, this could further damage your credit score, making it even more difficult to secure financing in the future.

5. Personal Liability: If you provide a personal guarantee for your business loan, you’ll be personally liable for repaying the debt if your business is unable to. This could put your personal assets at risk.

Steps After Loan Rejection

If your application for a business loan is rejected, it’s important not to despair. There are several steps you can take to improve your chances of success in the future:

1. Understand the Reason for Rejection: Lenders are required to provide a reason if they reject your application. Understanding this reason can help you address the issue in future applications.

2. Review and Improve Your Business Plan: A strong business plan is critical for securing a business loan. If your application was rejected, it might be worth revisiting your plan to ensure it clearly demonstrates your business’s potential for success.

3. Improve Your Credit Score: Taking steps to improve your credit score can increase your chances of securing a loan in the future. This might involve paying off existing debts, ensuring future bills are paid on time, or correcting any errors on your credit report.

4. Consider Alternative Financing Options: If traditional business loans aren’t an option, consider alternative financing options. This could include invoice financing, merchant cash advances, or crowdfunding.

5. Seek Advice: Consider consulting with a financial advisor or broker. They can help you understand your options, improve your application, and find lenders that are more likely to approve your loan.

Remember, a loan rejection is not the end of the road but an opportunity to reassess your financial situation and plan for a more secure financial future.

Bad Credit Business Loan FAQs

Can I get a bad credit business loan if I have bankruptcy on my record?

How can I find the best bad credit business loan for my business?

How can I improve my chances of getting approved for a bad credit business loan?