How to get a loan with a poor credit rating

You need to organise finance for your business, but your credit rating isn’t exactly A-star.

It may be that you’re just starting out in business and you haven’t yet had time to build up the kind of credit history that will qualify you for a bank loan. Or it could be that something has gone wrong, somewhere along the way, and you or your business have a few black marks on your credit report.

Poor Credit Score Illustration

If this is you, then I have good news for you.

Even with a poor credit record, there’s every chance you’ll still be able to get a business loan as long as you meet a few other criteria (I’ll get to those in a moment)…

… and are willing to pay the price.

There are some pitfalls of course, so you do need to know what to look out for.

That’s where this article comes in.

Here I’ll tell you everything you need to know about know about getting a loan when you have bad credit – where to look, how much it will cost, what to be wary of, and how to prepare and apply so you’ll have the best chance of getting your loan application approved.

Let’s start with where to look.

Read More on Unsecure Business Loans

Where to go for a bad credit loan

The most obvious place to go for a loan is a bank, right?

Well, not always.

In fact, I’d go as far as to say rarely.

The truth is that as an SME in Australia, your chances of being approved for a small business loan from a traditional lender are very low indeed.

High street banks and building societies are very strictly regulated and notoriously risk averse. Generally, they’ll only lend to well-established businesses that meet tight lending criteria, including several years’ profitable trading, a high minimum turnover, collateral to offer – and, you guessed it, a strong credit rating.

Decision from Credit Score Illustration

Credit rating falls under ‘character’ – one of the ‘five c’s of business credit’ that all lenders use as a basis when assessing loan applications.

Character tends to be especially important to banks, who are very careful about who they’ll deal with – so even if you’ve been in business for several years and your business does meet all their other requirements, a poor credit score will almost certainly disqualify you.

That means that if you do apply for a bank business loan, there’s a very high risk that your application will be rejected. Which will leave you with another black mark on your credit rating. The last thing you want!

So where can you turn instead?

Fortunately, Australia has a very strong alternative finance market, with scores of lenders offering all kinds of business finance. And some of those aim their services directly at people like you – business owners who are looking for a way to access finance despite your less-than-perfect credit record.

Fintech Other Options Illustration

Before we go on, let me give you a quick word of warning.

Alternative lenders don’t fall under the same regulations as the banks and building societies in Australia, which means you really need to do your research before you choose one.

I recommend that you ask your networks for recommendations or check online for social proof that businesses like yours have had a good experience with that lender. Be sure to check out their fine print and make sure you understand all the costs, terms and conditions before you sign any contracts.


Will you qualify for a bad credit loan?

Every lender will have their own criteria for assessing your application, and they all have a different appetite for risk. It may take some time to find a lender who is happy to work with you, but the fintech finance market is extremely competitive, so there’s a good chance you’ll be successful in your search for a loan.

Having said that, you will still need to meet their other criteria:

No Startup Business Icon

Even alternative lenders won’t usually deal with start-up businesses, so if you’re totally new on the block you’ll probably need to turn to another source of funding (you could try equity investors, peer-to-peer lenders or even crowdfunding).

Performing Well Icon

Your business will need to be performing reasonably well. Specifically, you’ll need to be making enough money to service your loan. This is called capacity – no lender, no matter how risk-tolerant, will lend to you unless you can provide clear evidence that you consistently generate enough profits (not turnover!) to cover all your current expenses plus your new loan repayments.

Term & Conditions Icon

You’re willing to accept their terms and conditions – which are very likely to include a high interest rate.

Which brings me neatly to the subject of cost.


Read More on Who Use Invoice Finance

How much will a bad credit loan cost?

There’s no denying it – bad credit loans are expensive.

If you think about it, it’s pretty easy to see why.

The lender is putting their precious cash into your hands. Given your poor credit rating, there’s a higher than average chance they won’t get it back. Why should they take the risk, when they could lend it to someone more creditworthy instead?

The answer is…

…money.

Many lenders (almost certainly including the Big Four banks and other traditional lenders) won’t consider lending to you. But as long as the return is high enough (i.e. you pay enough interest), an alternative lender may decide it’s worth the risk and give you the loan you need.

So how expensive are we talking?

Well, that’s always a tricky question to answer. Exactly how much interest you’ll have to pay will depend on just how risky the lender thinks your business is – plus other factors like how much you want to borrow, whether you’re offering any sort of security, and how long you need the loan for.

The interest on your bad credit loan may be calculated as a ‘factor rate’ rather than an annual interest rate. That means you’ll pay a multiple of the amount you borrow – say 1.3 – calculated on the full amount you borrow. You’ll then repay the principal (the amount you borrow) plus that interest back in instalments over the agreed term of the loan.

Loan Interest Infograph Illustration

At this point you might be wondering how much you’ll be able to borrow if you apply for a bad credit loan.

Once again, that depends on you and on the lender.

When they’re assessing your application to decide if, and on what terms, they’re willing to lend to you, they’ll also decide how much to offer you.

Once again, the biggest deciding factor will be your capacity – how much you can realistically afford to repay each month – but they’ll also look at the term of the loan, what you plan to use it for, and how risky they feel the whole thing is.

You may well find that you can only get a limited amount – say $10,000 to $50,000 (rather than up to $250,000, which is the maximum amount many lenders offer for unsecured business loans).

After a period of time, once you’ve proved you can reliably meet obligations, you may find your lender is willing to extend your credit limit. If not, making all your repayments on time and repaying your loan in full on schedule will go a long way towards repairing your credit record. Which may make it easier to borrow a larger amount – hopefully at a more favourable rate – in future.

In fact, given the cost of bad credit loans, it will almost certainly be in your interest to repair your credit before applying for a more substantial loan!

Before we move on to how you can apply for a bad credit loan …let’s talk about the pitfalls.


The disadvantages of bad credit business finance

There are lots of reasons why you might need finance for your business. You might want to:

Get a boost to your cash flow, especially if your income fluctuates

Buy in stock or take on extra staff to prepare for a business period

Buy essential equipment

Take advantage of bulk stock sales or an opportunity to expand your operations

Scale up your operations to take on larger contracts

If you can’t get the cash any other way, then paying a higher interest rate to secure the funding you need might be totally reasonable…

BUT

As I said earlier, alternative lenders aren’t yet highly regulated in Australia, and there are definitely some unscrupulous ones out there. If your business is especially high risk – or if you don’t do enough research and check who you’re dealing with – you could end up paying truly extortionate rates for bad credit finance.

If the rates you get quoted are off the chart, then keep looking – like I said, the market is very competitive, so there’s no need to accept usurious rates.

If you find that NO lenders will offer you a loan at a reasonable rate, then I strongly recommend you talk to your financial advisors and consider your options carefully.

If borrowing drives you deeper into financial problems and you’re eventually forced to default on your loan, you could do irreparable damage to your credit record – or worse, your business itself. Instead of taking that risk, you may need to postpone your loan application and take other steps to improve your financial position and your credit record before applying for finance.

There are some other pitfalls to look out for, too.

  • On top of the interest rates, there may be lots of other charges for your loan – set up fees, ongoing management charges, transaction fees, and early termination fees. Often, these won’t be obvious – you’ll need to dig around and check all the fine print to make sure you know exactly what you’re going to be paying.

  • Early termination fees, in particular, could end up costing you a lot of money. If your interest is calculated as a percentage rather than a factor rate, then the best way to save on interest is to repay your loan as quickly as possible. If you’re locked in by expensive early repayment penalties then you may end up paying far more than you really need to, should your financial position improve during the term of the loan.

  • The lender may look for other ways to reduce the risk of the loan – which means they could try to impose restrictive conditions on your business to protect themselves. For example, they may prevent you from offering credit terms to your customers – which could be a major competitive disadvantage in some industries – or insist that you only deal with certain customers who have a strong payment record.

  • If your business credit rating is poor but your personal score is higher, you may be asked to provide a personal guarantee of the business loan. This can put your personal assets (like your house) at risk, since you’ll be responsible for repaying the loan if your business is forced to default. This could mean you lose everything if your business fails – not just your livelihood, but also your home. That’s a big risk to take.

It really is vital that you understand all the conditions as well as the full cost of the finance you’re being offered so that you can make an informed decision about whether it’s the right choice for your business.

Right, now we’ve covered ‘why’ and ‘how much’, it’s time for the last big question.

How?


Read More on Unsecure Business Loans

How to get a loan when you have a poor credit rating

Actually, applying for a bad credit business loan is just the same as applying for an unsecured business loan, or any other form of small business finance.

There are four key steps.

1

Examine your motives and prepare a business case

Applying for a loan is always a major decision, because taking out finance will always cost you money. If the cash injection helps you generate more profits then the interest you pay for your loan, it may be a solid investment – but if not, it could do more harm than good to your business.

The fact is, taking on a business loan – especially at the rates you’ll pay for bad credit finance – might not be the answer to your cash flow problems. So before you start looking for lenders, it’s really important that you prepare a business case to find out whether the benefits actually will outweigh the costs.

In your business case you should include:

  • Details of how you plan to use the funds you’re borrowing to support or grow your business.

  • An analysis of your financial performance and income projections, to establish how much you can afford to borrow at different interest rates (based on how much you can afford to repay each month).

    Be sure to include calculations based on different interest rates, so you can see how much impact it will have on your repayments if rates go up.

  • Financial projections to show how much extra profit you expect to generate as a direct result of taking out this loan.

    Make sure you factor in any extra costs you’ll incur too – for example, if you use the loan to buy extra stock so you can sell more, you may also have to pay more warehousing and shipping costs.

It’s absolutely vital that you make realistic assumptions and consider all the costs of finance (including all those hidden extra fees and charges I mentioned earlier) so that your decision is based on accurate and complete information.

It may be that writing a business case is as far as you get. The fact is that taking on a loan isn’t always a sound business decision. It may be better to postpone spending the money until you can finance the purchase out of cash reserves – or at least until you’ve had time to repair your credit rating.

2

Pull together your evidence

As I said, all lenders will have some lending criteria and you’ll have to prove you meet them – especially when you’re applying for bad credit loan, since the lender will probably want to look very closely at your financial performance in order to assess the level of risk.

Rather than waiting until you’re ready to apply, it’s a good idea to pull together all your supporting documents in advance, so that the application process will be quick and easy.

Expect to be asked for:

  • Personal and business identification documents
  • Proof of how long you have been in business
  • Tax returns or financial statements to show your turnover, expenses and average monthly income
  • Six to twelve months’ business bank statements
  • Trading records / merchant statements to show your sales history – you may also be asked for copies of contracts with key clients
  • Details and proof of ownership of any assets you’re offering as security
  • Personal tax returns if you’re being asked to provide a personal guarantee
3

Find your lender

As I’ve said, you’ll probably have to turn to the alternative finance market for a bad credit loan, and I can’t stress enough how important it is to look around and fully research your options. Remember that the interest rate a lender will advertise won’t be the full story – you’ll need to add up all the costs and charges to get a comparative rate, and the cheapest might not be the best fit for your business.

For example, you might find a lender with a slightly higher rate but no early termination fees, or one that promises to review your credit limit and potentially increase your borrowing capacity after 6 months.

If you’re struggling to find a reputable lender or evaluate your options, you could engage a business loan broker to help you.

4

Lodge your application

Since you almost certainly won’t be dealing with a high street bank, your bad credit loan application should be pretty straightforward. Most online lenders have a simple electronic form for you to fill in, a facility for you to upload your supporting documents, and software to link them directly to your bank to view your statements.

Loan Online Application Illustration

As part of your application you’ll need to specify how much you want to borrow and how long for, and tell them how you intend to use the funds.

The lender may want to talk to you about your application and get more information about your business – this is a high-risk transaction for them, after all, so you can expect a little scrutiny – but even so they’ll probably assess your application pretty quickly.

In most cases, you can expect a decision within a day or two – and if the answer is ‘yes’, you could have the funds in your account very fast.


Conclusion

If your business credit rating is poor but you need finance, you don’t need to despair.

While the big banks are unlikely to offer you a business loan, there are lots of alternative finance providers who might, as long as you’ve been in business for at least six months and are making enough profits to service your loan.

Bad credit finance won’t come cheap though – you’re a high-risk proposition for a lender, so they’ll expect to be well compensated. What’s more, there are some risks involved – lenders can be unscrupulous, so you need to make sure you know exactly how much you’ll be paying and what conditions you’re signing up to. Above all, you need to prepare a detailed business case to make sure the benefits to your business will be greater than the substantial costs.

Good luck!

Get the funding the easy way

Get Started