If your business suffers from bad credit such as county court judgements, life can become very difficult indeed and business loans can be hard to come by. However, there are things you can do.
Living with a poor or a bad credit history – whether as a business or individual – can be difficult. Loans are out of reach and any forms of finance can be extremely expensive to access. However, there are things you can do and paying a higher rate for funding maybe something in the past.
Bad Credit Business Loans
Some alternative lenders specifically set out to provide small business loans for people or businesses with an adverse credit file. Their entire business model is based around people who might otherwise have struggled to access capital. So, if your business has been refused finance elsewhere this can be an option should you be in need of business funding.
However, they will be more expensive. The lower your credit rating, the greater the interest rates you will be required to pay. You may also have to put up an asset as security against a possible default. These loans, therefore, should only be taken out if you understand the full extent of the costs and have a clear plan to repay.
Lending criteria changes between lender to lender, so its worth knowing what their criteria is. If you keep trying, it could damage your credit score! At this point it is worth says don’t try a high street bank! as the saying goes ‘they will give you an umbrella in the sun shine and take it away in the rain”
Most lenders will require extra security if you do not have a strong financial past. One of the best ways to improve your chances of being approved for business loans if you have historic bad credit is to provide security. Security can consist of different forms such as business assets, if this type of security is not available you could provide a personal guarantee. A PG will solely be based on the value of your personal assets meaning your home. Another way is is for another person with a good credit history to take responsibility for the loan by co-signing the agreement, this is called a guarantor.
Understanding Poor Credit Score
The important thing to remember when understanding poor or a bad credit score is it will mean different things to different lenders. They will all have their own criteria of who they are willing to lend to. Poor credit lenders base their decision on missed payments, (CCJ’s) county court judgements or other issues such as defaults on repayments. Some will not be willing to work with anyone who has a less than exemplary record while others will be more forgiving. However, they will probably require you to pay a higher interest rate.
Before applying for a business loan, it can be a good idea to assess both your credit rating and the rating of your own business credit score. This will give you an idea of where things stand and what loans you’ll be eligible for.
Credit ratings can also change over time. So, even if you have had problems in the past, your score might not be as bad as you think if you have behaved responsibly ever since. A prolonged period of good behaviour can repair your score over time. This problem usually arrives when someone starts a business and tries to open a bank account, as a personal credit score is used. It is hard to understand your score ranges without a credit report.
Lenders will look at both you as an individual director and your limited company to assess the risk. Most people miss the point that their company does have a credit file, credit agencies and third party search platforms such as Redflag Alert from Begbies are quickly and cost effective ways of carrying out a check on your company.
What affects your credit score? Every lender has their own criteria on what is a good credit score. As a quick reference here are a few facts.
- Late or missed payments
- Existing unserviced debt
- County Court Judgments (CCJs) or bankruptcy
- Failed companies – Liquidation – Administration
- Making multiple applications in a short space of time in the last six months.
Credit Reference Agency (CRA) generates your business credit score to indicate the reliability of your company in regards to its history of making repayment. In the UK we have four CRAs which are Experian, Equifax, Crediva and TransUnion. Lenders will use this information on making a decision on the company’s eligibility for a loan. Based on this information they will set the terms if your application is successful. A higher credit score increases your chance of being offered a cheaper loan.
Once your supplies notice adverse credit against your business that may restrict supplies or ask for the following :
- Director guarantee agreements
- Payment up front for products or services
- Reduced payment terms.
Loan Options if your Business has CCJ’s or Defaults!
The good news is that there are alternatives. A growing number of providers are moving into the market offering short term financing options for businesses which do not rely on your credit score to the same extent. PDQ Funding offer business cash advance no credit checks to businesses with CCJ’s or defaults.
A merchant cash advance, for example, can provide a lump sum based upon your credit and debit card receipts, a great funding tool for cash flow. The provider will use this information to make a projection about your likely future sales and make an appropriate offer. As such, this is not a loan in the conventional sense, it is an advance based upon the sales of your business, which means it does not rely on your credit score in the same way as a loan.
Invoice factoring, may not technically fit in the bad credit business loans category but will allow you to unlock the value of your unpaid invoices. They will advance a percentage of your invoice value – normally between 70% and 80% and take on responsibility for managing the invoice and chasing payments. Once they have been paid, they will return the remaining amount to you minus their fee.
What Are The Options?
Here are a few options open to you if you are looking to secure a business funding with bad credit:
- Unsecured Business Loans
Unsecured business loans used to be the domain of the high street banks, this changed when a number of peer to peer and specialist lenders entering the UK market. An unsecured business loan can be arranged for most businesses, as long as the loan is considered affordable.
- Asset Finance
Asset finance is a great option for businesses that have lots of assets but are struggling for capital. Asset finance can be used to raise money against existing assets, or for buying new ones. As the asset is taken as security for the loan, the risk is lower to the lender, increasing the chances of your application being accepted.
- Merchant Cash Advance
Merchant Cash Advances work great with businesses that take a large amount of money each month through their card terminal. They allow you to raise money quickly and repay the lender by automatically taking a set percentage off each card sale and paying it directly to the lender. The acceptance rates for merchant cash advances are very high with acceptance within 24 hours.
- Invoice Finance
Invoice finance is another popular option for businesses with a poor credit history. If the business is owed a lot of money at any one time through invoices, there is a good chance that they will qualify for invoice finance. Once arranged, the lender releases a high percentage of the value of any acceptable invoice issued as soon as its raised, easing the cash flow of the business. Invoice finance is an excellent tool for businesses who must accept delayed payment terms.
What can be done if my company has a CCJ against it?
If your business receives a CCJ, it means your creditors have issued a court summons against your business and won for the money you owe. The court will have ruled that you will have to pay any outstanding debt. You will have 28 days from the date of judgment to pay the full amount. Failure to do so will leave the CCJ on your business credit file for six years.
Having a CCJ showing on the businesses credit file will lower the score of the company and deemed to be a higher risk. If you think the CCJ had been issued by mistake, you should contact the court that issued it and CRA to have County Court Judgment removed.
The Registry Trust has reported that there has been a 12 percent increase in county court judgments against businesses in England and Wales during the first quarter of 2019. The total number of CCJs issued being 35,779 with a combined total value of £107.2 million. This figure represents a rise of six percent when compared with the same period in 2018.
Bad credit start-up loans
If your individual credit history is poor it can be difficult to access a bad credit start-up loan. If this is the case there are things you can do to tip the scales back in your favour. Firstly, choose a provider whose lending criteria is a little more liberal. Again, the chances are you will have to pay a higher rate.
Written documentation such as business plans and clear financial projections will also bolster the lender’s confidence in you as will any specialist business knowledge. If you have all these in order, it can make you appear significantly more attractive to a lender.
Although there are a number of lenders who specialise in offering start up loans to people with bad credit histories. The inescapable fact is that access to finance will be more difficult and more expensive. Even those willing to work with people whose credit histories are less than perfect will demand higher fees and offer less favourable credit terms.
Interested, like to know more?
So, if you’re looking for business finance with an adverse pasts, don’t panic. Yes, it can be more difficult and, yes, the costs will be higher, but there are options available. You simply need to know what these alternatives are and how they can be used to help you achieve your business goals with our business finance solution.
If you feel we can support your business, simply complete the application process online.
If you are suffering from business debt contact the Business Debtline