5 min read

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

When you’re running your own small business, you don’t always have enough available cash to buy things that you need, whether that’s equipment, tools, a vehicle or something else. The solution can be to take out a business loan, of course, which can enable you to improve your premises, buy more stock or cover a host of other costs. That’s all well and good, but what if you have a bad credit score? This can only come to light after you’ve had a bank loan or other credit application turned down. So, how can you find out what your credit score is and what can you do if your credit score is bad?

What is 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.

Why might I have a bad credit score?

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.

How do I check my credit score?

How to repair a bad credit score

Unless your credit records contain errors, you won’t be able to repair your bad credit score/rating overnight, it can take many weeks, months or longer. Repairing your credit can make it easier to get a loan or other type of credit in the future. Recommended steps to repair your bad credit score include:

Register to vote

Lenders use the electoral register to check your name, current and previous addresses. If they cannot find you because you’re not registered, it could cause a delay or result in your application being unsuccessful.

Prove you’re creditworthy

If you’ve not borrowed money previously, potential lenders can’t judge how likely you are to make your repayments, which affects your credit score. Taking a small amount of credit can help you to get more in the future.

Have good credit habits

Make sure your repayments are always on time and don’t go beyond your credit limits. Missing payments could well have consequences; lenders will look at your credit history, particularly recent years.

Don’t apply too often

Making many applications for credit could lead lenders to believe that you’re struggling for money or that you’re bad at managing your personal or business cash flow. If you just want to compare rates, ask your lender to do a quotation search instead of a credit application search. Then, it won’t show up on your credit profile.

Check for errors

Some credit reports contain errors that suggest that people or businesses are more of a credit risk than accurate information would show. If it looks like information is missing or there are errors, contact the lender or CRA to have them corrected. Also, you can add a “notice of correction” to explain why a payment was missed, for example, if you had a serious illness.
Register to vote

Lenders use the electoral register to check your name, current and previous addresses. If they cannot find you because you’re not registered, it could cause a delay or result in your application being unsuccessful.

Prove you’re creditworthy

If you’ve not borrowed money previously, potential lenders can’t judge how likely you are to make your repayments, which affects your credit score. Taking a small amount of credit can help you to get more in the future.

Have good credit habits

Make sure your repayments are always on time and don’t go beyond your credit limits. Missing payments could well have consequences; lenders will look at your credit history, particularly recent years.

Don’t apply too often

Making many applications for credit could lead lenders to believe that you’re struggling for money or that you’re bad at managing your personal or business cash flow. If you just want to compare rates, ask your lender to do a quotation search instead of a credit application search. Then, it won’t show up on your credit profile.

Check for errors

Some credit reports contain errors that suggest that people or businesses are more of a credit risk than accurate information would show. If it looks like information is missing or there are errors, contact the lender or CRA to have them corrected. Also, you can add a “notice of correction” to explain why a payment was missed, for example, if you had a serious illness.

Bad credit business loans: some key facts

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.