Bad credit business loans should be viewed as a last resort. Most other types of loans and financing options will have lower interest rates.
However, sometimes you and your business have little choice but to use them.
What Are Bad Credit Business Loans?
Getting a business loan when your credit history is poor is challenging, but not impossible. There are numerous financing alternatives available on the market, some of which we have listed below.
Types of finance options available for businesses with a bad credit history
Business credit cards
A business credit card gives owners of businesses access to credit, which can be used to oversee certain business costs. However the APR can be an eye watering 25% or more.
A key point to note? Interest only applies to balances that are carried over each month. On top of this, applying for this type of card is often a great deal easier than applying for a bank loan or other funding, making it a popular choice for those with low credit scores.
This type of loan is more conventional business financing whereby a company receives a lump sum, which they are then required to repay over time. This is a good option for businesses that need a larger amount now. Term loans tend to last between three months and ten years and you can borrow up to £500,000. APRs usually start around 9%, but can go much higher.
Business lines of credit
This loan gives companies access to a set borrowing limit. The draw period tends to last around five years, and in this period, companies can access money as and when they need it.
Interest only amounts to what has been used, and the business can access the credit line again should they require further funding, providing it is being repaid throughout the draw period. Once the draw period comes to an end, the repayment must be finalised.
Invoice factoring is when a company sells overdue invoices to another company, which responds by giving them a lump sum. This sum usually comes in at up to 95% of the invoice’s total amount.
The ‘factoring’ business then takes responsibility for any further collections, paying the company in question a sum of the remaining invoice total, just minus what is known as a factoring fee.
Unlike other loans, invoice factoring can be easier to acquire if your customers are mostly businesses.
This type of financing allows businesses to borrow money deemed collateral for any outstanding invoices. Unlike invoice factoring, the company in question is wholly responsible for repayment collections, and the loan must be repaid once the invoices have been paid. This type of financing is very accessible to businesses with bad credit, mainly because underlying invoices collateralise it.
This type of financing surrounds borrowing money to buy machinery or equipment for a company. It is more available to borrowers with poor credit as the funding is monitored by the underlying collateral. For best results, small businesses should opt for equipment financing options that boast long terms of anything up to 25 years.
These smaller loans assist businesses with bad credit ratings to gain access the funding fast. Certain microloans begin at around £500, whereas others can reach £50,000. The latter is the preferred option for those who require cash to expand business operations.
Merchant cash advances
Also known as MCAs, these loans allow business owners with access a set cash sum through giving the lender, which usually comes in the shape of a merchant services business, a small part of their future sales receipts.
This type of financing is suited to companies with a higher sales volume and those that require speedy access to funding yet don’t have a strong credit profile.
How Can I Get Business Funding With Bad Credit Rating?
Having a bad credit rating can make it challenging to access a business loan. Nonetheless, it isn’t completely out of the question. For best results, there are a few tips you can follow:
- Create an easy-to-understand business plan that demonstrates your company’s ability to create revenue and, therefore, meet loan repayments.
- Find a guarantor who boasts a better credit file than you.
- List any collateral of value you have in place, as this will make you a stronger, less risky applicant and, as such, will help you to secure a business loan.
- Do everything you can to improve your credit score before applying for a loan.
How Do Bad Credit Business Loans Work?
In a nutshell, these types of loans are aimed at companies that don’t have the best business finance scores, as opposed to those with good credit ratings. These loans work by taking personal and business credit into account. This is especially the case for traditional lenders.
What Are the Expected Costs of Bad Credit Business Loans?
You can request business loans from various providers, including the likes of building socities, traditional banks and numerous online lenders.
When it comes to costs, it is essential to note that the lower interest tends to be reserved for extremely creditworthy applicants. Despite this, it’s still imperative to look at numerous lenders, including those that offer different business finance loan terms and loan amounts, as well as fees and APRs.
Certain financial providers also boast an application process that is much easier and quicker than their competitors. What does this mean? It ensures businesses gain access to money quickly — even if they showcase a poor credit rating.
What Are the Pros and Cons of Bad Credit Business Loans?
There are many pros and cons to consider when it comes to poor credit score business loans, some of which we have listed below:
- A quick influx of cash: when you request a loan via an alternative lender, you could be in the running to receive the loan in question in a week or even less.
- You can improve your credit: lenders tend to report bad credit activity to the likes of credit bureaus. If you start to make your repayments on time (even to a bad business loan), these are still accounted for and help to improve your credit rating.
- There are numerous options: To get bad credit loan, it is not always necessary to put your assets up as collateral. If you do not want to do this, try to look into unsecured business loans instead of traditional loans. These types of loans are extremely versatile.
- Ongoing fees: bad business credit score loans boast numerous fees, most of which are higher than those of traditional business loans. So before signing up for a loan, you must read the small print. Fees to look out for include personal check fees, late payment fees, and charges for payments that don’t clear.
- Higher interest rates: bad business credit score loans always have higher interest rates as they know the business looking for the loan has limited options to play with.
- Automatic withdrawal: when it comes to repaying your business loans, your lender can put automatic withdrawal dates in place. What does this mean? Repayments can be taken out of your account monthly, weekly or even daily.
- Collateral: certain bad business loans will necessitate that you put down collateral to secure the loan. This can be daunting as if you cannot make repayments, this collateral could be taken. This is dependent on your poor credit history and just how bad it is.
Will I Need a Guarantor to Secure a Bad Credit Business Loan?
In many cases, guarantor loans are offered to those with bad credit as an alternative to secured business loans that require collateral as security.
What Factors Affect Your Credit Score?
The key factors to affect a businesses credit include:
- The debt sum
- Payment history and cash flow
- Credit check business loans
- Types of credit borrowed
- Maxed out credit cards
- Any accounts sent to credit reference agencies.
Tips on How to Improve Your Business Credit Rating
There are several ways to do this:
- Report incorrect data
- Keep unused accounts open
- Ask sellers to report payments
- Ensure you pay bills on time
- Balance credit usage ratio.
Does My Personal Credit Score Improve My Chances of Securing a Bad Credit Business Loan?
As well as reviewing your business credit score, many lenders will also review your personal credit score. To qualify for a bad business loan, applicants should boast a credit score that is a minimum of 530.
What Collateral Will I Need to Secure A Bad Credit Business Loan?
From business accounts to financial records and personal loan details, lenders require various data to secure a small business loan. If you have bad credit, finance providers may also ask for collateral such as business assets (if you don’t have a solid financial history).
Is a Bad Credit Business Loan the Right Option for Me?
Before signing up to get a business loan, it is a good idea to ask yourself why you need loans for bad credit. It may be that you need it to start a business or increase business accounts through purchasing new equipment.
Who Offers Bad Credit Business Loans?
Several institutions offer small business loans for bad credit, which include credit unions, traditional banks and online lenders.
Doing your research and choosing the best option for your operation is the key to ensuring you heighten your credit score and business offerings.
How long does it take to obtain funding with bad credit?
With small business loans, this is heavily dependent on the provider and the secured business loan you opt for.
Is a credit check required for obtaining a business loan?
When it comes to adverse credit business loans, to secure finance or access finance, traditional loans will check a business’s credit history, whilst less conventional loans for bad credit will rely on a personal guarantee.
What does APR mean?
In simple terms, annual percentage rate of charge, which in a nutshell, equates to the interest for the entire year.
What’s the difference between short-term and long-term bad credit business loans?
As the name suggests, short-term loans require payment within a few months, whilst long-term business loans for bad credit can last for several years.