The Real Business Financing Struggle: Bad Credit and Approval

Most businesses will need access to finance and borrowing at some point in their trading lifetimes whether it’s for expansion, modernising or to support cash flow through a tough period. But, a business that has a bad credit rating will all too commonly find that financing can be quite hard to come by. Indeed, bad credit business loan/s are few and far between and are usually provided by the more dubious lenders on the market. Some desperate entrepreneurs may even find themselves wondering ‘should I take a personal loan for my business?’.

In this post we are going to take a look at how a bad credit rating can hurt a business. We will also touch on the pitfalls of taking out bad credit business finance and non-bank loans for bad credit businesses, and will finish with a few tips on how to improve business loan approval rate.

Bad Credit Business Finance – The Sad Reality

All businesses have a start up cost. Even the most simple and humble idea for an enterprise needs something to get it started. Take a window cleaning business for example – the founder will need to invest in a good ladder, a bucket, some flyers to find customers and may also need a sum of money to live on whilst building up a client base. Whilst some start-ups are funded by their founders personal savings, many rely on borrowing in order to get moving.

It isn’t just a new business that needs access to finance either. Even established and perfectly successful businesses will at some point, want to upgrade their equipment, open a new outlet or aggressively advertise for new customers.  Or on the other hand they may simply need to borrow to get them through a rough patch as the COVID pandemic reminded a lot of business owners.

This is why having a good credit rating and easy access to good quality business lending is of paramount importance for a business. If a business has a bad credit rating then low interest borrowing from reputable banks and lenders may not be attainable for them. Instead a business may have to take out borrowing at a higher interest rate or may even be pushed to take more extreme action in order to get hold of some much needed finance.

Desperate Measures – Bad Credit Business Loan/s

There are “backstreet” lenders out there who specialise in lending to bad credit businesses. These lenders operate a high risk business model and as such charge much higher interest rates than the high street banks; the interest rate offered to a bad credit business may be 2 – 5 times higher than the one available to a business with a good rating. If a business is already struggling then having to pay exorbitant interest rates may tip them over the edge towards insolvency.

The other issue with bad credit lenders is that they are not always as patient as mainstream lenders and may commence foreclosure proceedings or legal action at the first sign of a default rather than trying to work with the business towards a resolution.

Should I Take a Personal Loan For My Business ?

Some businesses are not even able to secure lending from the risk hungry, bad credit specialists. Others are, but may simply be unwilling to accept the high interest rates. In these cases the owners are often forced to take out personal lending in their own name whether in the form of a personal, unsecured loan,  by maxing out credit cards, or by re-mortgaging their homes. 

These are all very serious steps to take. If the limited liability business fails, then the founder can ultimately walk away liability free, but this is not the case with personal finance – if they cannot service the debt then they risk losing their home or being made personally bankrupt.

How to Improve Business Loan Approval Rate

Fortunately there are some ways in which any business can manage its credit score.  However, do note that prevention is better than the cure though and it is vital to stay on top of it, and not let it degenerate in the first place. 

• Make Payments On Time

It is very important to pay all bills, credit or invoice payments on time. It is quite surprising how regularly business owners simply forget a payment due date and end up making late payments when they had the ready money to pay. Over time, this will steadily erode their credit score.

Also, if a business is going through a temporary cash flow problem, it is often better to pay a bill from an overdraft or a credit facility rather than pay it late.

• Keep Credit Balances Low

One of the unspoken rules of credit facilities such as credit cards and overdrafts is that the limit is only to be reached in exceptional circumstances. If the bank extends  an overdraft of $10,000, then ideally a business should only ever go $3,000 into it. The “30% rule” is not an absolute, but is a very useful guide. Maxing out credit facilities concerns lenders, and creates the impression that the business is struggling. 

• Keep Old Credit Accounts Open

It is very tempting (and quite logical) to want to cancel credit facilities that are no longer being used. However, keeping old credit facilities open (even with a zero balance) helps to create the impression that a business is able to successfully manage multiple creditors and as such, improves their rating.

On the other hand…

• Don’t Have Too Many Creditors!

Whereas lenders like to see that a business can balance multiple creditors, they don’t like to see that it has too many. There is no “right number” of creditors as it all relative to a businesses size and profile. However, any small to medium sized business should aim to have an overdraft and a few credit cards in addition to any capital borrowing it is repaying.

Start All Over?

As we have seen, there is a lot that a business can do to manage its credit rating. Furthermore, there are ways and avenues for even a poorly rated business to access finance. Sometimes though, the best course of action may just be to start all over again, dissolve the existing business and start up again in a new name.  

Whilst this may seem an extreme measure, it can sometimes be the better option than entering into a cycle of bad credit and spiralling business debt. Basically, if a business finds that it is consistently unable to access “good lending”, and the director/owner has a clear personal credit score that won’t undermine the new business, then this nuclear option should be considered. However any business owner should firstly check out this bad credit business finance guide and explore all possibilities in full before going down this route.

Final Thoughts on Non-Bank Loans For Bad Credit Businesses

As we have now seen, bad credit business loan/s and non-bank loans for bad credit businesses can be both expensive and risky, so should only be used as a last resort.  Thankfully, we have shown you a few ways how to improve business loan approval rate, and so hopefully your business will never need to frequent the “backstreet” lenders. 

If your business is struggling to get good credit and you are wondering “should I take a personal loan for my business”, then before you do take this step it is worth thinking about starting again as they may prove to be wiser and safer in the long run.