Getting a startup business loan with bad credit: all you need to know

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 are more limited with bad credit, there are still options to explore to help get your plans off the ground. 

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 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. Note that you can have 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 1,000, 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.

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, and UK-based and registered. 

The government-backed Start Up Loan scheme aims to help small businesses get cash injections. However, you must pass a credit check to qualify, and 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, and 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. However, these tend to have high interest rates and fees, making them expensive, so you must ensure you can afford the repayments. You often need to have a good turnover or valuable assets to qualify. 

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 loan. Because this security reduces the lender’s risk, you could qualify for a more competitive interest rate or a larger lump sum. 

However, 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.

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. 

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 your business credit report and your personal one 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. 

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. Search for business grants in your area on Gov.uk

• 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.