How can I get a business loan if I have a bad credit score?

Your credit score is a three-digit number that is an indicator of how reliable you are when it comes to repaying money you’ve borrowed. This is then used to give you a credit rating, ranging from very poor/poor up to excellent/exceptional.

The UK has three main CRAs (ie credit reference agencies) – Experian, Equifax and TransUnion. Each holds data about your financial history (called a “credit report”) and this is used to generate a credit score for you and your business. Each agency has its own scoring system, so your credit score may vary slightly between the three. But if you get a bad credit score from one, you’ll get the same from the other two.

• Having a bad credit score makes it tougher – if not impossible – to get credit.
• You’ll have far fewer financial options available to you.
• If you’re granted a credit card, loan or mortgage, the interest rate could be higher and you could get much less credit.
• Having a higher credit score means you’re more likely to get credit and better rates, higher credit limits and a wider range of borrowing options.

When you or your business applies for credit, whether a loan, credit card, mortgage or vehicle finance, the potential lender requests your credit report from one of the three UK CRAs and makes their decision on that basis.

You’re likely to get a bad credit score if you have:

• missed or been late with previous credit repayments
• defaulted on a credit agreement
• gone over your existing credit limit
• had CCJs (County Court Judgments) against you
• been declared bankrupt or insolvent or you’ve liquidated (ie wound up) a previous business.

Sometimes securing a business loan can prove difficult if you or other senior people within your business have a personal history of Individual Voluntary Arrangements (IVAs) or you’ve had Debt Management Plans in place.

• Checking your credit score with Experian (“The UK’s most trusted credit score”) is “Free forever”. You can also order a free copy of your Statutory Credit Report.
• Equifax offers a free 30-day trial, after which you pay £10.95 per month to look at your full credit report.
• With TransUnion, you can get a one-off credit report for free.
• Another option could be checkmyfile. Its report includes information from all three UK CRAs and is free to use for 30 days, thereafter it’s £14.99 a month.
• Other free credit score-checking options also include CreditKarma and TotallyMoney.

In some circumstances, a high street bank will still provide a loan to a business with a poor credit rating, although the credit terms are likely to be much more limited and the fees and interest charges significantly higher.

Failing that, a bad credit business loan may provide a solution. They include secured loans (ie where you put up property as security), unsecured loans (ie where you don’t put up security and pay high interest as a consequence) and guarantor loans (ie an unsecured loan but with a guarantor who co-signs the credit agreement, so the interest is lower). Each is designed to reduce the risk to the lender, which are typically specialist bad credit loan companies.

If you decide to go for a bad credit business loan, carefully consider the options available to your business and find out exactly how much you’ll need to repay. Compare the APR (annual percentage rate) of each and factor in all costs and fees. Seek advice from an accountant so that you fully understand the implications for your business and its cash flow.