Business owners, in particular small businesses owners, often need to borrow money to meet organisational expenses. However, taking out a business loan isn’t just about how well the company is doing. You may find lenders asking about your personal credit history and how you’ve structured your business if you’ve not been operating for a long time.
If you have a poor credit score, your business loan application may take longer to process. Lenders may not necessarily reject your application, but they may require additional documents or give you a loan subject to a few conditions. To avoid this complication, you can check your credit score in advance and work on improving it if you need to.
How do I get a business loan with a bad credit score?
To increase your chances of getting a business loan, you should ideally collect all documents attesting to your financial wellbeing, as well as your business’s prospects. This can include business activity statements or a balance sheet, along with your income statement or tax returns. You can also ask an accountant to prepare a statement if you have more than one source of income.
Consider requesting a copy of your credit report from one of the main credit reporting bureaus operating in Australia, Experian and Equifax, and see if it suggests that you have any outstanding credit issues that could indicate that lending to you is a risky proposition.
The good news is that credit reports also include incidents that positively impact your credit score, so you can accumulate more such events and increase your credit score. Alternatively, you can consult a financial advisor on the steps you should take to rectify your credit situation.
Remember that if you have any past defaults, they may stay on your credit report for a while. Also, if you feel your credit report is inaccurate, you should contact the credit reporting bureau and get the error fixed. If you need to take significant steps to turn around a bad credit score, you could consider delaying your business loan application.
If you don’t want to wait before getting a small business loan with a bad credit score, you may end up getting a loan with higher interest rates or a shorter loan term. Another option is to check if lenders will accept a business asset as collateral and let you apply for a secured business loan.
However, you may find not many lenders offer either of these choices - at least with terms you want. Further, applying to several lenders quickly can also negatively affect your credit score, so is best avoided.
Getting a small business loan if you're self-employed but have a bad credit history
Self-employed individuals typically find it harder to convince lenders about their ability to repay loans, especially if they’re new to the market. This can happen for several reasons, including not receiving a regular income and not having sufficient income documentation.
Individuals with a bad credit history are likely to be even more disadvantaged and should look at ways of increasing their credit score before applying for the loan. As a self-employed person, you may have invested your savings into your business or taken on other debts.
You’d then have to build up your savings again - and lower your existing debts to boost your credit score. If you have too many debts or multiple credit cards, another option is to look at consolidating all your debt to simplify the repayment.