Can I Get a Business Loan With Bad Credit?

Having bad credit doesn't necessarily mean your business cannot get a loan.

Different business lenders have different approaches to credit risk. Some require a relatively clean credit history, while others are prepared to consider applications involving CCJs, previous defaults, missed payments or other adverse credit.

For many SME lenders, the important question isn't simply whether adverse credit exists. It is what happened, when it happened, how serious it was and what the financial position of the business looks like today.

A strong, established business with an isolated historic credit issue can present a very different lending proposition from a company experiencing continuing financial difficulties.

What does bad credit mean for a business?

"Bad credit" isn't a single category.

It can describe a wide range of circumstances, including:

• a low business credit score;

• County Court Judgments (CCJs);

• previous loan or credit defaults;

• missed or late payments;

• returned Direct Debits;

• HMRC arrears;

• historic insolvency;

• adverse personal credit relating to a director or guarantor; or

• a history of applying for significant amounts of credit.

The severity of these issues varies considerably.

A lender is unlikely to view a small, satisfied CCJ from several years ago in exactly the same way as several recent unsatisfied judgments.

This is why the detail behind the adverse credit matters.

Can I still get a business loan with bad credit?

Potentially, yes.

There are lenders that consider businesses with adverse credit rather than automatically declining an application because a particular issue appears on a credit report.

The lender is likely to look at the credit issue alongside the wider financial position of the business.

That might include:

• turnover;

• profitability;

• current cash flow;

• recent bank conduct;

• existing borrowing;

• trading history;

• available security; and

• the financial position of directors or guarantors.

The stronger the underlying business, the easier it may be for a lender to become comfortable with an isolated credit problem.

How do lenders assess bad credit?

There are several characteristics of adverse credit that can be particularly important.

How recent is it?

Recency matters.

An issue from four years ago followed by satisfactory financial conduct can tell a very different story from a default last month.

Recent adverse credit can indicate that the financial problem is still ongoing.

Older adverse credit may have less relevance where there is strong evidence that the circumstances have changed.

How much was involved?

The size of the problem matters too.

A relatively small CCJ arising from a disputed supplier invoice is different from a substantial judgment relating to unpaid finance.

The amount should also be considered relative to the size of the business.

Was it an isolated event?

One adverse event isn't necessarily the same as a pattern.

A lender may distinguish between:

one historic problem followed by otherwise satisfactory conduct

and

repeated defaults, missed payments and judgments over an extended period.

Repeated adverse events can suggest a more fundamental financial problem.

Has it been resolved?

A lender will often want to know whether the debt has subsequently been paid or otherwise resolved.

For example, a satisfied CCJ may generally be easier to explain than an outstanding judgment that remains unpaid.

Resolution can demonstrate that the business or individual has addressed the issue, although the original adverse credit may still remain relevant to the assessment.

Why did it happen?

Context can matter significantly.

Suppose a company received a CCJ following a genuine dispute with a supplier.

That can present a different risk from a CCJ arising because the business simply didn't have sufficient money to meet its obligations.

Likewise, a temporary period of difficulty caused by the loss of a major customer may be viewed differently if the business has subsequently replaced that revenue and returned to stable trading.

The explanation needs to be credible and supported by the subsequent financial conduct of the business.

Does a low business credit score mean my application will be declined?

Not necessarily.

Business credit scores can be useful, but they aren't the only way to assess an SME.

Some lenders rely heavily on automated credit scores.

Others carry out more detailed underwriting and consider the underlying information behind the score.

For example, a company's credit score may have been affected by historic financial information while its recent trading and cash flow have improved substantially.

A lender conducting manual underwriting may be able to take that more recent information into account.

This is one reason why two lenders can review the same business and reach different decisions.

Does a director's bad personal credit affect a business loan?

Potentially.

A limited company has a separate credit profile from its directors, but SME lenders may also consider the personal credit history of directors or guarantors.

This is particularly relevant where a director is providing a personal guarantee.

The lender may consider personal CCJs, defaults or other adverse credit alongside the financial position of the company.

However, an isolated personal credit issue doesn't necessarily mean that an otherwise strong business cannot obtain finance.

The nature and circumstances of the adverse credit remain important.

Can I get a business loan with a CCJ?

Potentially.

The lender may want to know:

• whether the CCJ is against the company or an individual;

• the amount;

• when it was registered;

• whether it has been satisfied;

• what caused it; and

• whether there are other judgments or adverse credit events.

A small historic CCJ that has been satisfied can present a substantially different lending proposition from a large recent judgment that remains unpaid.

We cover this in more detail in Can I Get a Business Loan With a CCJ?

What if I've previously defaulted on a business loan?

A previous default is likely to receive close attention because it relates directly to the repayment of credit.

But it doesn't necessarily mean that another business lender will never lend to you.

The lender may consider:

• when the default occurred;

• circumstances that caused it;

• amount involved;

• whether the debt was subsequently repaid;

• whether the previous lender suffered a loss; and

• financial conduct since the default.

A historic default followed by several years of successful trading can be viewed differently from a recent default while the company continues to experience cash-flow problems.

What if I have recently missed loan payments?

Recent missed payments can be more difficult because they may indicate current financial pressure rather than a historic problem.

A new lender will naturally want to understand why the business is unable to meet its existing commitments before adding another repayment.

One missed payment caused by a temporary timing issue may be explainable.

Repeated missed payments across several finance facilities are more likely to raise concerns about affordability.

Do returned Direct Debits count as bad credit?

Not necessarily in the same way as a CCJ or formal default, but lenders reviewing business bank statements may pay attention to returned payments.

One returned Direct Debit doesn't necessarily indicate serious financial difficulty.

Repeated returned payments can be more concerning because they may demonstrate that the company regularly has insufficient cash available to meet commitments as they fall due.

The lender will normally consider the pattern rather than one transaction in isolation.

Can security help if I have bad credit?

Potentially.

Providing suitable security can reduce a lender's potential loss if the business fails to repay the loan.

This can sometimes allow a lender to consider an application that would be more difficult on an unsecured basis.

However, security doesn't remove the need for affordability.

A lender should still expect the business to repay the loan from its normal cash flow rather than relying on enforcement of the security.

Will bad credit mean a higher interest rate?

It can.

Lenders generally price loans according to risk, although pricing models differ considerably.

Where adverse credit increases the perceived probability of default or potential loss, a lender may:

• charge a higher interest rate;

• offer a smaller amount;

• require a shorter term;

• require additional security; or

• impose other conditions.

In other cases, the adverse credit may fall outside the lender's criteria entirely.

This is why comparing lenders solely on headline interest rates can be misleading.

How can I improve my chances of getting a business loan with bad credit?

The most useful approach is generally transparency.

If you know there is adverse credit, explain it.

Tell the lender:

What happened.

Provide a straightforward explanation.

When it happened.

Historic and recent problems aren't necessarily viewed in the same way.

Whether it has been resolved.

If the debt has been satisfied or repaid, make that clear.

What has changed.

Explain why the same problem is less likely to happen again.

How the business is performing today.

Strong recent trading can be particularly important where the adverse credit is historic.

Trying to conceal a known issue is unlikely to help. Credit searches and other underwriting checks may identify it anyway.

Should I apply to several bad-credit business lenders?

Be selective.

Submitting numerous formal applications isn't necessarily the best way to find finance.

Different lenders have different credit appetites, so identifying lenders that are genuinely prepared to consider the particular issue can be more effective than applying indiscriminately.

This is especially relevant if applications involve hard credit searches.

Before applying, it can be useful to establish whether the lender is likely to consider the type of adverse credit involved.

Is bad credit more important than current business performance?

It depends on the circumstances.

For some lenders, certain types of adverse credit will result in an automatic decline regardless of the company's current performance.

Other lenders take a more nuanced approach.

Where manual underwriting is involved, the lender may consider:

historic credit conduct + current financial performance + explanation + subsequent behaviour.

A strong current business doesn't erase serious adverse credit.

But equally, an historic credit problem doesn't necessarily mean an otherwise healthy company should be treated as if it remains in financial difficulty today.

Applying for business finance with Adelpha Capital

Adelpha Capital provides business finance to established UK SMEs.

We consider applications on their individual circumstances rather than looking solely at a single credit score. Where there is adverse credit, the nature, severity and timing of the issue can be considered alongside the wider financial position of the business, including turnover, cash flow, recent bank conduct, trading history and existing borrowing.

Having adverse credit therefore doesn't necessarily mean that your business cannot be considered for finance.

If you're looking for business funding, you can apply online or contact the Adelpha Capital team to discuss your requirements.