Bad Credit Business Loans?
To begin with “Do Bad Credit Business Loans exist?” Well having bad credit does not always prevent a business from obtaining finance, it does however reduce the number of lenders willing to assist.
Bad credit business loans are only provided by a handful of lenders in the UK. These lenders often charge a premium for their loans as they match the fees to the perceived risk of the business.
Many businesses give up or do not even try to obtain funding if they know they have bad credit.
Is it possible to get a business loan with bad credit?
This very much depends on the level of the bad credit and the business circumstances. The key to obtaining a business loan is to offer the lender a good level of security which outweighs the bad credit.
The first port of call for many businesses when looking for finance is to visit their bank. A business will soon find out that the banks doors are well and firmly closed when it comes to bad credit. At this point most businesses stop looking for finance as they do not want to be rejected again. If a business still requires finance then they will need to look at the alternative funding market.
Over the years the alternative funding market has grown significantly. In 2009 there was about 40 lenders on the market. In 2019 there are over 300 lenders all willing to assist when the banks say NO.
Fin-techs – If your business has bad credit then like banks it is probably best to keep away from Fin-techs. This is primarily due to the use of algorithms which the Fin-techs use. The algorithms primarily look at the credit rating of a business and instantly reject any poor credit applicants. We have yet to see a Fintech who can accept bad credit applicants.
How does Bad Credit affect my Business Loan application?
Each lender will have their own set of lending guidelines. These are monitored very strictly behind the scenes by a team of underwriters. With most of the High Street banks and Fin-Techs if you do not meet these strict guidelines then the application is likely to be rejected.
Alternatively lenders are seen to take a more practical approach to underwriting and will often listen to reasons for poor credit. There is often a reason for the poor credit and lenders often refer to these as “story book lending”.
If your Business is to be provided with the funding which it requires then a “story book” lender is the one to seek out for Bad Credit Business Loans.
So what Bad Credit do lenders look for?
CCJS / Defaults / Bankruptcies.
Lenders will review the credit rating of the Business and will then look at the credit ratings of the Directors / Owners. The reason why the Directors / Owners are reviewed is because most lenders if not all require some form of Personal Guarantee from the Directors / Owners. A good credit rating improves any chances of obtaining funding.
If there are CCJS or Defaults in the background these can often be overlooked if not serious. Alternative lenders will look at reasons to lend as opposed to reasons not to lend. Each lender will take into account how severe the bad credit is and make a decision based on these.
In our experience if you have Overdue Accounts it is likely to be an instant rejection. Lenders will take a view on CCJS, Defaults and Bankruptcies as there is an active Business to repay their lending. If you have overdue accounts this indicates a possibility of failure and therefore no trading business to repay the lending.
Please make sure that your accounts are fully up to date.
The Financial Performance of a business is very important to any lender. All lenders will request copies of the Businesses accounts for review. This is to assess if the Business is making a profit or has some nett worth for the lender to take comfort from. A business making no profit and has zero nett worth is of no interest to many lenders.
Owners / Directors Background
Lenders will ask to credit check the owners / directors to assess their background. This is to check for any poor credit and also to check the history of business ownership. If there is a history of failures in the background then this will be unfavourable to any lenders.
Will lenders overlook Bad Credit?
Lenders on the alternative market will always look at ways to provide funding to businesses. They are aware that the banks will provide funding to all good credit businesses and so they need to be flexible and consider bad credit businesses.
The key to obtaining funding with bad credit is to offer a lender some security over their lending. This needs to outweigh the bad credit to get approved.
Lenders will look at the business first and foremost. If there is a positive trend in turnover and profitability this always helps.
Lenders will then look to see what security is being provided to them to cover the lending. See below for more detail on what lenders will require.
What is available to a Business with Bad Credit?
Because lenders know that not all businesses have good credit they are required to provide a more bespoke solution. The products available to businesses with Bad Credit are as follows:
Revolving Credit Loan
If the Business is showing a good turnover and profitability history then a revolving credit loan can be provided. This is similar to a bank overdraft. A lender will agree a limit on a facility and will allow a business to borrow up to this limit.
Revolving credit loans are great as a business only pays interest on the amount actually borrowed. With traditional loans the interest is charged on the whole loan irrespective of when the loan is actually utilised.
Most revolving credit loan providers require the owner / director to be a homeowner.
Merchant Cash Advance (Loan)
A Merchant Cash advance is for Businesses that utilise card payment terminals. A loan is provided to a business based on their average monthly takings through a card terminal.
This type of facility is favourable to a lender as their loan is repaid back every time a card payment is taken. A small percentage (around 10%-15%) is repaid back every time a card is swiped. This gives the lender some comfort as their loan is repaid in small amounts over a period of time. It also means that the business does not need to find that set amount of money each month that a traditional loan requires.
Bad Credit can often be overlooked with this type of facility as the lender will be confident that they will be repaid through the takings through the card terminal.
Invoice Finance (Factoring / Discounting)
A great solution if a business has a poor credit rating. This is because lenders will switch their emphasis on repayment to the debtor (s) as ultimately these are the ones who will be repaying the lending on behalf of the business.
As long as the directors / owners are not currently bankrupt then an Invoice Finance facility can be put in place with poor credit in the background.
Invoice Finance enables a business to obtain funding from it’s current debtor book. In simple terms a lender will agree to advance a set amount of money up front (usually 85%) minus a small fee. When the invoice is paid the lender will then release the remaining 15% which was held back originally.
This type of funding is growing in popularity as it is low risk to the lender and can be put in place quite simply.
For a FREE Invoice Finance comparison – click below
Asset Finance (Asset Refinance)
Similarly to Invoice Finance lenders will often overlook poor credit in favour of providing Asset Finance. Assets provide comfort to the lender in the event of default as they can recover the Assets and reduce their potential losses.
For FREE Asset Finance quotes – click below
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The above information will allow a business a better understanding of what is available when there is bad credit to be considered.
We would recommend using a specialist Business Finance broker as we can often negotiate the best rates. We can also find you the best deal from our panel of over 200+ lenders based in the UK.
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