Business Loans With Bad Credit: A poor credit history does not automatically prevent a UK business from borrowing.
However, it can affect which lenders consider the application, the available amount and the total borrowing cost.
The lender will usually assess more than a headline credit score. Trading performance, cash flow, security and the funding purpose may also influence its decision.
A well-prepared application gives the lender something more useful than optimism. It provides evidence that the proposed debt remains affordable.
At a Glance
Business loans with bad credit may be available through specialist, alternative or secured lending routes.
Lenders may examine the company, its directors, recent bank conduct and existing debts.
A historic credit problem can carry less weight when the business now shows stable income and reliable financial management.
Possible routes include:
- secured business loans;
- unsecured specialist loans;
- invoice finance;
- asset finance;
- merchant cash advances;
- commercial property finance;
- government-backed Start Up Loans.
Rates, fees and security requirements may be higher because the lender is accepting greater risk.
Businesses should compare the full borrowing cost before submitting an application.
What does bad business credit mean?
Bad business credit generally describes financial records that indicate increased lending risk.
The problem might relate to the company, a director or both.
Examples can include:
- late loan or credit repayments;
- missed supplier payments;
- defaults;
- County Court Judgments;
- returned payments;
- high existing borrowing;
- insolvency proceedings;
- frequent credit applications;
- weak company accounts;
- persistent overdraft use.
Each lender applies its own assessment rules.
Therefore, one lender may decline an application that another lender could consider.
A lender may also distinguish between historic and recent credit problems. A satisfied CCJ from several years ago may be treated differently from a recent unpaid judgment.
Do business lenders check personal credit?
Many lenders check the personal credit records of directors or business owners.
This is particularly common for:
- sole traders;
- partnerships;
- new limited companies;
- businesses with limited trading history;
- applications requiring personal guarantees.
A limited company has its own legal identity. However, its directors can still influence the lender’s risk assessment.
Personal credit may become more important when the company lacks established accounts or reliable financial records.
Business owners should therefore review both their commercial and personal credit information before applying.
What did the business finance market look like in 2023?
The article was first published during a more demanding borrowing environment.
British Business Bank data showed that gross bank lending to smaller businesses reached £65.1 billion during 2022. This represented a 12.8% annual increase.
However, the success rate for smaller businesses seeking loans fell from 80% to 64%.
Challenger and specialist bank lending reached a record £35.5 billion during the same period.
These figures indicated that funding had not disappeared. Yet businesses needed stronger evidence and more appropriate lender selection.
Read the British Business Bank’s Small Business Finance Markets Report 2023 for the original market analysis.
Can a business loan be approved after a CCJ or default?
Approval may remain possible, but the details will matter.
A lender may ask:
- when the credit issue occurred;
- how much money was involved;
- whether the debt has been settled;
- why the problem happened;
- whether similar problems continued;
- how the business has performed since;
- whether security is available.
An isolated historic problem may be easier to explain than repeated recent defaults.
The lender will usually want evidence that the original cause has been addressed.
For example, a temporary cash-flow problem caused by a late customer payment may carry different implications from continuing unpaid debts.
Applicants should explain the facts clearly. They should avoid hiding information that will appear during underwriting.
What will a lender assess?
The assessment depends on the loan type, lender and requested amount.
Common considerations include:
Trading history
Longer-established businesses may have more evidence of income, expenditure and repayment capacity.
Newer businesses may need detailed forecasts, contracts or evidence of future work.
Turnover and cash flow
Turnover alone does not prove that a loan is affordable.
The lender may examine operating costs, profit, tax liabilities and existing repayments.
Business bank statements
Statements can show regular income, overdraft use, returned payments and the overall conduct of the account.
Existing debts
The lender will consider current loans, credit facilities, hire purchase agreements and tax arrangements.
Loan purpose
A clear commercial purpose can strengthen the application.
Typical purposes include equipment, stock, refurbishment, expansion or short-term working capital.
Available security
Property, machinery or other assets may reduce the lender’s exposure.
Security does not replace affordability. However, it can influence the loan amount and pricing.
Our main business loans guide explains common loan structures and commercial uses.
Secured business loans with bad credit
A secured business loan is supported by an asset.
Commercial or residential property may be accepted, depending on the lender and circumstances.
Because the lender has security, it may consider applications that do not fit standard unsecured criteria.
Possible advantages include:
- larger borrowing amounts;
- longer repayment terms;
- wider lender choice;
- greater tolerance of historic credit problems.
However, secured borrowing creates direct risk to the pledged asset.
The property or asset could be repossessed if repayments are not maintained.
Businesses requiring property-backed borrowing should also consider whether a commercial mortgage better matches the funding purpose.
Unsecured business loans with poor credit
Unsecured loans do not rely on a specific property or asset.
The lender may therefore place greater weight on:
- current turnover;
- profitability;
- recent bank statements;
- business age;
- director credit;
- personal guarantees.
Loan amounts may be lower and repayment terms may be shorter.
Rates and fees can also be higher because the lender has less security.
An unsecured loan should not be judged by its monthly payment alone. The total repayment and all charges must be reviewed.
Alternative funding options
A conventional term loan is not the only possible source of business finance.
Invoice finance
Invoice finance releases money against unpaid business invoices.
It may suit businesses selling to other businesses on agreed payment terms.
The provider will usually assess the invoice book, customer quality and payment history.
Asset finance
Asset finance can fund vehicles, machinery or equipment.
The financed asset normally supports the agreement.
This may reduce the need for a large upfront purchase.
Merchant cash advance
A merchant cash advance is generally repaid through a percentage of card sales.
Repayments can move with revenue. However, the overall cost may be substantial.
Businesses should compare the total repayment rather than only the collection method.
Bridging finance
A bridging loan can provide short-term property-backed funding.
It is not usually designed for general long-term working capital.
A credible repayment or refinancing strategy is essential. Read about short-term bridging finance before considering this route.
Development finance
Property developers may require staged funding for construction or major refurbishment.
The lender may assess the site, planning position, development costs and proposed exit.
Our development finance guide explains the structure in greater detail.
Can a start-up get funding with bad credit?
Start-ups can face greater difficulty because they lack historic trading evidence.
The lender may rely more heavily on:
- the founder’s credit record;
- a detailed business plan;
- cash-flow forecasts;
- industry experience;
- personal investment;
- available security.
A government-backed Start Up Loan may be considered by eligible applicants.
However, it is an unsecured personal loan used for business purposes. Applicants must pass a credit check.
The scheme offered loans from £500 to £25,000 and business support during the relevant period.
Check the current GOV.UK Start Up Loan guidance before applying.
How can a business strengthen its application?
Preparation cannot remove an adverse credit record. However, it can make the wider application easier to assess.
Before applying:
- Review company and director credit reports.
- Correct inaccurate credit information.
- Check whether old debts show as satisfied.
- Prepare recent business bank statements.
- Gather filed accounts and management figures.
- Calculate existing monthly credit commitments.
- Explain the exact use of the funds.
- Prepare realistic cash-flow forecasts.
- Identify any property or assets available as security.
- Avoid several speculative applications.
Multiple applications can create further searches and suggest financial pressure.
A targeted enquiry may be more effective than approaching numerous lenders without understanding their criteria.
Business owners considering future property borrowing may also find the self-employed mortgage guide useful. It explains how business income and personal credit can affect a mortgage assessment.
What costs should be compared?
The interest rate is only one part of the borrowing cost.
Businesses should also review:
- arrangement fees;
- broker fees;
- valuation costs;
- legal fees;
- early repayment charges;
- personal guarantee requirements;
- security documentation;
- default charges;
- total repayment;
- repayment frequency.
Daily or weekly collections may create different cash-flow pressure from monthly repayments.
The cheapest quoted rate is not always the most suitable facility. The structure must match how the business earns and uses money.
When might borrowing be unsuitable?
A loan may not solve an underlying trading problem.
Further borrowing could increase pressure when the business:
- cannot meet current commitments;
- has continuing tax arrears;
- lacks reliable income;
- needs finance only to cover recurring losses;
- cannot explain how the loan will improve its position;
- has no credible repayment plan.
The purpose of finance is not simply to obtain money.
Good borrowing gives the business enough time and capacity to produce more value than the debt costs.
Where that relationship is absent, delaying the application may be safer.
Speak to a commercial finance broker
Business loans with bad credit require careful lender selection.
Connect Mortgages is a credit broker, not a lender. We can review the funding purpose, available evidence and relevant credit history.
We can then identify whether a business loan or another commercial finance route may be considered.
Approval is not guaranteed. Rates, fees and terms will depend on the lender’s assessment.
Contact Connect Mortgages to discuss your business funding requirements before making multiple applications.
