Getting a startup business loan with bad credit: all you need to know
We explain your options for applying for a startup business loan with bad credit.
It’s often harder to secure a startup loan with bad credit because lenders already view small businesses as risky.
If you’re starting a business and looking for funding, you might find it harder to get a startup business loan if you have bad credit.
But while your choices may be are more limited with bad credit, there are still options to explore to help get your plans off the ground.
Key takeaways
Bad credit does not always rule you out, especially if you have a clear business plan and realistic repayment forecast
Your options may be more limited and you may face higher interest rates or smaller loan amounts
Review your credit report before you apply and deal with any existing debts where possible
These unsecured and secured loans could help you grow your business, cover running costs or even fund a new company.
Can you get a startup business loan with bad credit?
It’s possible to get a startup business loan with bad credit, but the process could be more challenging and may take longer.
Businesses with low credit scores typically have fewer lenders to choose from, and you might need to approach a specialist lender online as these can have more flexible lending criteria.
It’s often harder to secure a startup loan with bad credit because lenders already view small businesses as risky. Given your business has a limited trading or financial history, it’s considered an even higher risk.
This means that if you do secure a startup loan, you can expect to pay above the average business loan interest rate and borrow a smaller amount compared to a business with an excellent credit history. This limits the risk for the lender.
What is considered a bad credit score?
Your business credit score varies depending on the credit reference agency used. You can have both a business credit score and a personal credit score, and lenders can use both to assess your creditworthiness.
Generally, the lower your credit score, the harder it is to get a loan. Business credit scores usually range from 0 to 100, and a score of between 0 and 40 is generally considered high risk.
By contrast, personal credit scores can range from 0 to 1,250, with anything below around 560 considered poor, but this depends on the credit reference agency.
If both your business and personal credit scores are low, you may struggle to get a business loan.
Read more: How to build business credit in 5 easy steps
Types of loans for startup businesses with bad credit
Some of the loans to consider include:
Startup loans
Startup loans are specifically designed to provide finance to new businesses. To qualify, your business must be less than three years old, UK-based and registered.
The government-backed Start Up Loan scheme aims to help small businesses get cash injections. However, you must pass a personal credit check to qualify, so you might find it easier to get a startup loan with a specialist lender instead. These lenders still check your credit history, but some have more lenient eligibility criteria.
That said, you must have a business plan ready to demonstrate:
How your business works
How you plan to use the money from the loan
How you plan to repay it
You can expect to pay higher interest rates and higher fees, or have to sign a personal guarantee. This means you become personally responsible for repaying the loan if your business can’t.
Bad credit business loans
Some specialist lenders offer ‘bad credit business loans’, specifically tailored towards businesses with poor credit. You often need to have a good turnover or valuable assets to qualify. However, these tend to have high interest rates and fees, making them expensive, so make sure you can afford the repayments.
Secured business loans
If you have a suitable asset to use as security for your loan, you might find it easier to qualify for a secured business loan. Because this security reduces the lender’s risk, you could qualify for a more competitive interest rate or a larger lump sum.
Be aware that if you fail to keep up with your repayments, your lender could repossess your asset and sell it to recover its money.
Guarantor business loans
These loans require a guarantor, usually a friend or family member, to step in and make your loan repayments if you’re unable to. Again, this reduces the risk for the lender, but your guarantor typically needs to own their own home and have good credit. And if you fall behind and the friend or family member has to step in, it can put strain on your personal relationship with them.
What to consider before applying for a startup loan
Before applying for a startup loan, you need to check if it’s affordable. Think carefully about how much money you need to borrow and how much you can afford to repay. Remember that you typically pay a higher interest rate if you have bad credit, so be sure to factor this in.
You should also make sure you have prepared a solid business plan, as well as bank statements and other financial documents to demonstrate how you plan to repay the money. This is a key element of applying for a business loan, and the more prepared you are, the greater your chances of acceptance.
Read more: No-credit-check business loans explained
Seven tips for getting a startup loan when you have bad credit
Follow the below tips to help you get a startup loan with bad credit:
Check your credit report: As a first step, it’s worth checking both your business and personal credit reports for errors. If you find any, contact the relevant credit reference agency to get them corrected.
Improve your credit rating: Paying bills and filing company accounts on time can boost your credit score, as can asking suppliers to share your payment history with credit reference agencies.
Shop around: This can help you to find the most competitive loan rates available to those with poor credit.
Use an affordability calculator: Use a loan repayment calculator to work out the cost of your monthly repayments and ensure you can afford them.
Gather the relevant documents: Make sure you have all the necessary documents ready before you apply. These include bank statements, cash flow forecasts, financial projections and your business plan.
Complete the application form with care: Application mistakes can lead to rejection, so take your time filling in the form to ensure it’s accurate.
Space out applications: Try to spread out credit applications by three to six months. Too many applications in a short space of time can make you look desperate for credit and prevent lenders from letting you borrow. If a lender rejects your business loan application, it’s important to find out why before applying again.
Seek advice if you need it
If you’re concerned about having bad credit or worried about any existing debt it may be worth getting advice before you apply for a loan.
Free services such as StepChange and the National Debtline can help if you’re struggling with debt. You could also speak to a business adviser or finance broker if you need help understanding your borrowing options in more detail.
Getting advice early can help you avoid applying for unsuitable loans and make a more realistic plan for funding your new business while protecting your personal finances.
Managing repayments for your startup loan
Understanding how you plan to repay your loan is crucial. If your loan repayments aren’t affordable, you could struggle to pay back the loan which could cause more damage to your credit score.
If a lender offers you a startup loan, you should be told:
The total amount borrowed
The total amount to repay
The term of the loan
The amount to repay (and whether that can change)
The due date of all your repayments
The interest rate and any fees
If you can make all your repayments in full and on time, your credit score should start to improve, and this can help you access further funding in the future.
Should you get a startup business loan for bad credit?
This depends on your business and its financial situation. If you’re confident you can afford to repay your startup business loan, it could help you secure the funding you need to get your business off the ground and improve your credit score at the same time.
But if taking on a loan is likely to result in financial problems for your company, you risk damaging your credit score further and building up debt, and ultimately, your business might not survive.
Alternative funding options for businesses with bad credit
A business loan isn’t the only way to get funding for your business. There are other options to explore, as we’ve outlined below:
Government grants: Your business might qualify for a government grant if it meets certain criteria. Bad credit isn’t a problem as you won’t need to pay the money back
Equity crowdfunding: This lets you raise money for your new business from several investors. In return, you give them equity in your business
Angel investors: These high-net-worth individuals invest their own funds into a small business in return for a minority stake. Angel investors can also offer valuable business support
Business credit cards: You might find it easier to apply for a business credit card that lets you borrow funds as and when you need them. What’s more, repaying your balance on time helps improve your credit score
Find out more in our guide to how to raise money for a business without a loan.
FAQs
If your business is brand new - or if you're trading as a sole trader - it won’t have a credit history or a credit score. This is why lenders may look at your personal credit score.
However, as you start to pay bills and file company accounts, your business credit score should start to go up. Opening a business bank account can help, too.
Generally, having bad credit means paying higher interest rates on business loans and other forms of credit. This is because lenders view your business to be at higher risk of defaulting on the loan. That’s why it’s crucial to ensure you can afford your repayments before taking out a business loan.
It may be possible to get a startup loan with a County Court Judgment (CCJ), but it can make approval harder.
Lenders may look at how recent the CCJ is, whether it has been paid off and how strong the rest of your application is. If you have a CCJ, it’s worth checking your credit report to see the current status of it and being upfront about your circumstances before you apply.
Yes, some lenders will consider applications from startups with no trading history but they may rely more heavily on your personal credit history and business plan when making a decision.
You’ll usually need to show how the loan will be used, how the business will make money and how you plan to repay what you borrow.
It can take a few days to a few weeks for your loan approval to go through. Lenders need to carry out the necessary checks to work out whether your loan is affordable. If you’re applying for a secured loan, your lender must value your assets as well which can lengthen the process.
Being refused for a startup business loan doesn't automatically rule you out forever. But it’s sensible to find out why your application was rejected before making another one.
Improving your business plan and reducing existing debt could increase your chances next time.
About Rachel Wait
Rachel has spent the majority of her career writing about personal finance for leading price comparison sites and the national press, including for the Mail on Sunday, The Observer, The Spectator, the Evening Standard, Forbes UK and The Sun.
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