How to get a business loan with bad credit

Bad credit can feel like a heavy weight, especially when you're trying to grow or sustain a business. But here’s the good news: having bad credit doesn’t mean you’re out of options. With the right approach, you can still secure the funding you need. In this post, we’ll break down what a bad credit business loan is, how it works, and what you need to know to improve your chances of approval.

A bad credit business loan is specifically designed for businesses that have a less-than-perfect credit score. These loans come with higher interest rates due to the added risk for the lender, but they can still provide the funds you need to keep your business running smoothly. Whether it’s managing payroll, improving cash flow, or investing in new equipment, these loans can be used for a variety of business needs.

It’s important to note that businesses with bad credit may struggle to borrow from traditional lenders, such as banks, who might offer smaller loan amounts or stricter terms. In contrast, several lenders now cater specifically to businesses with bad credit, especially those demonstrating strong revenue or valuable assets. While the eligibility criteria and terms can vary, these loans can still serve as a viable option for businesses (or their directors) with poor credit scores. However, keep in mind that the interest rates and fees are often higher than those of standard loans, so it’s essential to weigh the costs against the benefits before applying.

Yes, you can still qualify for a business loan even if you have bad business credit. Lenders will look at your business credit score and, in some cases, your personal credit score as well. While a lower score might mean higher interest rates or less favorable terms, it doesn’t mean you're automatically disqualified.

You may also need to offer a personal guarantee, which means you’ll be responsible for repaying the loan if your business is unable to do so. This helps lenders feel more confident about offering you a loan, even with bad credit.

Securing a loan for your business may also depend on the creditworthiness of its senior management. Lenders often review the personal credit scores of directors, especially if they are required to provide personal guarantees. A poor credit history, including factors like IVAs, debt management plans, or previous business failures, can significantly impact loan eligibility. It’s important to understand how both business and personal financial histories can affect your application and work to address any red flags before applying.

Your business credit score is a snapshot of your financial health. It’s a number, typically out of 100, that’s based on your payment history, the amount of debt you owe, and other financial factors like legal issues or the industry you're in. A lower score signals higher risk to lenders, which can lead to higher interest rates or more stringent loan terms.

Several factors can impact your ability to secure a business loan, especially with bad credit. Some of the most common considerations include:

• Business CCJs: County Court Judgments can make lenders wary, depending on how many you have and their value.

• Trading history: If your business is new or has limited trading history, some lenders may see it as too risky.

• Previous financial issues: If your business has faced Winding Up Orders or other legal challenges, it could affect your loan applications.

• Director’s history: If a director has been involved with failing businesses, it could influence how lenders view your current venture.

• Missed or late credit repayments: Any record of missed or delayed payments could impact how lenders assess your creditworthiness.

• Defaulted on a credit agreement: Failing to meet the terms of previous credit agreements can reduce your chances of approval.

• Exceeded your existing credit limit: Continuously exceeding your credit limit may signal to lenders that you're not managing your current finances well.

These factors don’t necessarily disqualify you from getting a loan, but they may limit your options or affect the terms offered.

If you have bad credit, you still have several loan options:

1. Secured business loans: These loans require collateral, like equipment or property. The loan amount is based on the value of the asset, which gives lenders security.

2. Unsecured loans: While you don’t need to offer collateral, unsecured loans typically come with higher interest rates.

3. Merchant cash advances: If your business processes a lot of credit card payments, this could be a good option. Repayments are based on a percentage of your daily sales.

4. Peer-to-peer lending: This involves borrowing from individual investors rather than traditional banks. If your business has a strong cash flow, P2P lending can be a viable option.

Business credit cards for bad credit: These cards often have lower credit limits and higher interest rates, but they can help rebuild your credit score if you pay off balances regularly.

Like any financial decision, bad credit business loans come with advantages and disadvantages.

Pros:

• Access to essential funds, even with a poor credit history.

• Opportunity to use the loan for a variety of business needs.

• Timely repayments can help improve your credit score over time.

Cons:

• Higher interest rates mean the loan will cost more overall.

• You may be offered smaller loan amounts compared to businesses with good credit.

• Fewer loan options may be available.

If you’re looking to improve your credit score before applying for a loan, here are a few practical steps you can take:

1. Check your credit report: Review your business credit report for any errors or outdated information. Correcting mistakes can give your score an immediate boost.

2. Pay debts on time: Make sure to pay any outstanding debts or credit card bills on time. Consistent payments will gradually improve your score.

3. Limit new credit applications: Multiple applications for credit can negatively impact your score, so avoid applying for several loans at once.

4. Update your information: Make sure all business details, like your address and contact information, are up to date with creditors and agencies.

5. File accounts on time: Keep up with filing taxes and financial reports promptly, as late filings can signal financial trouble.

Stay on top of invoices: Paying suppliers on time helps maintain your business’s reputation and keeps your credit score intact.

Getting a business loan with bad credit may not be easy, but it’s definitely possible. By understanding your options, improving your credit score where you can, and carefully choosing the right loan product, you can get the financing your business needs to thrive. Remember, bad credit doesn’t have to hold your business back—there’s always a way forward.

Ready to explore your options? Apply for a business loan with mcl finance and we'll be by your side to take that next big step in your future.