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How to Finance a Small Business with Bad Credit

Credit history can have a significant impact on your ability to get financing for your business. If you have a high credit score, then financing is likely to be relatively easy to come by. On the other hand, a low credit score could make it much more difficulty to find a willing funding source. However, that doesn’t mean it’s impossible. Over recent years, a broad range of lending platforms have started offering financing for high-risk businesses. Read on to find out a little more about how to finance a small business with bad credit.

Why does my business have bad credit?

There are all sorts of reasons why your business may have bad credit, including late payments, collection accounts, or filing for bankruptcy. When deciding whether or not to extend financing to a business, banks will look at a number of factors, including business CCJs (county court judgements), winding orders, the financial history of the directors, and the visible financial performance of your business. So, if any of these apply to your business, is getting finance a lost cause?

Can you get business finance with bad credit?

Short answer: yes. You may still be able to find financing even if your business has bad credit. However, you’ll probably need to look at non-traditional sources of financing, such as alternative lending platforms or government grants, or be willing to offer different forms of security to guarantee the loan. So, what are the different financing options for businesses with bad credit? We’ve put together a rundown of some of the potential sources of finance that your business may be able to use:

1. Getting a small business loan with bad credit

Although many banks won’t consider lending to a business with bad credit, there are some alternative, web-based lenders who offer business loans specifically for companies that are dealing with bad credit. It’s worth remembering that getting a small business loan with bad credit isn’t likely to happen unless you’re willing to accept much higher interest rates and fees. There are a number of bad credit business loans that you may be able to get, such as:

  • Asset finance – If you have an asset-rich business, lenders may extend financing and take equipment, property, or vehicles as security, thereby reducing the risk.

  • Guarantor loan – Some lenders will be willing to offer a loan to businesses with bad credit on the condition that a guarantor is willing to take responsibility if you’re unable to make payments.

  • Turnover loan – Even if your business has a history of financial issues, a high turnover may convince a lender to provide you with a turnover loan (a type of loan based on your company’s turnover, also referred to as revenue-based financing).

Many web-based lenders offer microfinancing solutions which you may also wish to explore. Typically, these loans are smaller than traditional types of loans and are available to businesses with bad credit.

2. Startup business line of credit with bad credit

Alternatively, you may be able to get a startup business line of credit with bad credit. A line of credit is essentially an unsecured loan that you can keep reusing as often as you need, provided that you don’t go over your credit limit or stop making payments. They tend to be a good option for operational expenses or unexpected purchases. While many lenders will have stringent requirements around credit history that could block you from receiving a startup business line of credit with bad credit, there are providers who offer lines of credit for people who don’t have a clean credit history.

3. Government startup loans with bad credit

You may also be able to get a startup business grant for bad credit or government startup loans with bad credit. Grants are essentially non-repayable sums of money that are aimed at providing investment for companies in specific industries, occupying specific niches, or serving specific community groups. While your business’s credit score is likely to be evaluated when deciding whether your application is successful, it’s not the only consideration. The awarding body will also evaluate your business plan and work plan, as well as the extent to which your business addresses the grant’s objectives.

4. Invoice financing

Another form of financing is referred to as “invoice finance.” Put simply, invoice financing is a type of finance that allows you to monetise your company’s outstanding invoices. There are multiple types of invoice finance, but one of the most prominent is invoice factoring. In essence, this is when you sell your outstanding invoices to a factoring company, receiving around 80-90% of the value upfront. You’ll receive the rest after the invoice has been resolved, minus fees and disbursements. Obviously, invoice finance isn’t a long-term financing solution, but if you need immediate investment, it could be a potential avenue to explore. 

5. Funding from friends or family

Finally, there’s the “friends and family” option. It may not be ideal, but if you’re struggling to find any other sources of financing, relatives and friends could be a potential option. They may be less likely to dwell on your credit score and be in a better position to evaluate your proposal’s strengths and weaknesses than banks/lenders, which often automate the credit approval process.

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GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services. GoCardless SAS (23-25 Avenue Mac-Mahon, Paris, 75017, France), an affiliate of GoCardless Ltd (company registration number 834 422 180, R.C.S. PARIS), is authorised by the ACPR (French Prudential Supervision and Resolution Authority), Bank Code (CIB) 17118, for the provision of payment services.