When you apply for a business loan, your business's credit history is one of the most important factors a lender considers. It's an indicator of your business's financial performance and its history of managing financial commitments.
So, if you have bad credit history it can result in your loan applications being denied. However, this doesn't eliminate your chances of securing finance altogether.
Expert overview: The 3 things you should know when getting a business loan with bad credit
- Bad credit happens to business owners more often than non-business owners, but it won't stop you from building a business.
- You have secured business loans as well as finance from smaller, alternative lenders to consider if you need a loan.
- Bolster your application with a business plan, detailed financials and financial forecasts.
What is "bad credit" and can I still get a business loan?
There's no one definition of bad credit, especially when it comes to business loans. Lenders will generally look at the personal credit histories of company directors, and if the business is established they may also look at the business's credit file and credit score.
If you personally have bad credit, that is, default listings, missed or late payments, multiple credit enquiries or just a low credit score, you may find it difficult to be approved for a business loan. Difficult, but not impossible.
What's the difference between a personal and business credit file?
Both your personal and business credit file contains information that helps lenders and creditors determine whether they want to do business with you. Your personal credit file also contains information of your commercial undertakings.
- Personal credit file. This includes your name and other personal information, details of consumer and commercial credit accounts you've held, any negative listings such as defaults or missed payments and information on the public record such as bankruptcies and court judgements. You will also have a personal credit score.
- Company credit file. Your company's credit file will include the company's structure and its shareholders, the company's credit information including applications and defaults, any business events that are lodged with ASIC or details lodged with the Personal Property Securities Register will be included, as will a company credit score.
How can I get a business loan with bad credit?
Traditional banks may be tough on businesses with bad credit, but alternative financial lenders tend to have more relaxed criteria. You could also apply for a different type of loan or put up business or personal assets as collateral.
Secured bad credit business loans
If you apply using assets as collateral, the lender may be more ready to approve your application. Here are a few things to keep in mind when applying for a secured business loan:
- Assets such as business equipment, vehicles, property and funds in savings accounts can be used as collateral for a secured business loan.
- These kinds of loans are generally granted by banks. Terms and conditions differ, so it's a good idea to shop around for the loan that best suits your budget.
- Since your application is fortified with collateral, you generally benefit from more competitive interest rates and flexible repayment terms.
- If you can't make your repayments, the lender will sell your assets to cover what you owe.
Following the proliferation of small and medium businesses in Australia, there has been a growth in the number of alternative financial lenders offering loans to business owners with less-than-perfect credit or with no security.
Here's why many business owners turn to alternative lenders:
- They offer a selection of small, short-term loan products.
- Bad credit history isn't a determining factor, you just need to show that your business has the capacity to repay.
- Repayments are made over a shorter period, and responsible borrowers can be rewarded with better rates the next time they apply for a loan.
- Loan terms are tailored to what you can afford.
- Alternative lenders don't require security for the loan amount.
- The application is quick, often with same-day approval.
If you have outstanding invoices that are locking up your cash flow, you can consider invoice factoring. Invoice factoring involves selling your unpaid invoices for a fee in order to receive the outstanding payments more quickly. This option is becoming increasingly popular amongst business owners because:
- Bad credit history isn't a factor.
- No real estate is required as collateral.
- You have the option to finance some or all of your invoices.
- You can enter into an ongoing arrangement with the factoring company.
Even with bad credit history, you can get the cash boost your business needs with terms to suit your financial situation.
Bad credit doesn't lock you out of finance in Australia, but it's important to compare your options to find the right type of finance available to your business.
How can I compare my bad credit business loan options?
There are a few options you can consider for your business, but as any business venture is a serious undertaking, it's important to opt for the best one for your needs. Here's how to find it:
- Flexibility to match your business structure. Business loans vary in terms of their flexibility, with each of them offering a variety of different repayment terms, loan amounts, top-up options and other features. Make sure you understand what your business needs before you select the type of loan you're applying for. Your cash flow estimates should show when periods of fluctuations should occur, and therefore what type of repayment structure and loan type may suit you best.
- Loan term. While banks tend to offer minimum loan terms of one year with standard business loans, alternative lenders have been offering terms as short as three months, giving you a range of terms to choose from. You also have line of credit loans and overdrafts to add into your comparison, which each having no set terms.
- Eligibility criteria. Bad credit loans will come with more flexible criteria but you still need to ensure your business meets the minimum criteria that are set. Check for minimum monthly turnover and a minimum operating period for non-startup loans.
- Features to match your needs. Deciding what your business needs out of the loan should help when you're comparing your options. If you are a startup, you may be unsure of your cash flow projections and so want the ability to top-up your loan. If you're taking out a loan to buy stock that will be sold in the next six weeks, you will likely not want a loan with terms longer than a year. Consider the purpose of your loan, your business's financials and then compare your options by features that will suit.
Questions we've been asked financing a business with bad credit
What do I need to apply?
This depends on the type of lender you apply with. Some new lenders on the market let you connect your business' accounting software into their systems to allow the lender to make a decision in minutes. Other lenders simply need your business financials to be able to make a decision.
Can I use a personal loan to finance a business?
You may be able to get a bad credit unsecured personal loan for business purposes depending on the lender you're applying with. Keep in mind that these loans are designed to be used for personal use and so won't offer you the flexibility and features that are designed for a business. However, if you're only looking for a small amount you might find a personal loan suitable for your business financing needs.
I need to purchase equipment. Should I purchase the equipment with a loan or a lease?
There are some lenders that offer bad credit loans for the purchase of equipment. However, if you only need the equipment for the short-term or you're unsure if your business can afford the rates being offered, you can consider some lease options as well. These include a hire purchase, where the financier purchases the equipment on your behalf and you pay it off in installments, or a finance lease, where the lender rents the equipment to you for an agreed-upon period. You can explore some of your equipment financing options here.
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