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How to get a loan for a new business with no credit history

Starting a business with no money and no credit history can be hard but not impossible. The answer is getting a business loan. Here is how new business finance works in the UK.

What kind of small business loans can I get in the UK?

In the UK, there are many kinds of loan options for new businesses, as well as other alternative funding routes like crowdfunding, angel investors, and venture capital investors.

However, most angel investors and venture capitalists will want to see explosive growth before committing money. If you’re not building the next Facebook, then these options might be more suitable for you:

  • Government-backed Startup loans. These are specifically meant for new businesses and entrepreneurs. These loans can provide up to £25,000 for an individual, and up to £100,000 for a group of four directors. The interest rate is fixed at 6% per year, and repayment terms can range from 1 to 5 years. These loans also come with mentorship to help new businesses succeed.
  • Business cash advances. These are suitable for businesses that receive payments through credit or debit cards. These advances can range from £2,500 to £300,000. Repayment is made by deducting a percentage of your daily card transactions, which means that you will need to already be earning revenue.
  • Invoice financing. This is similar to cash advances, in the sense that it depends on your existing revenue. The difference is that you’ll be using invoices instead of card transactions. Invoice financing lets you receive up to 90% of the invoice value immediately. Your business then repays the loan once the customer pays the invoice.
  • Equipment financing. This is a secured loan used to buy business equipment. The terms can be structured as leases or loans, with repayment periods up to 5 years. This type of financing can help your small business to buy equipment without having to pay a large upfront cost.
  • Short-term business loans offer quick access to capital, typically with repayment terms of up to 18 months. However, since they’re unsecured, these loans are almost entirely dependent on your credit score as you’ll be acting as a guarantor for your small business.
  • Government-backed loans offered through the British Business Bank. These offer pretty good terms for small businesses. These loans typically have lower interest rates and more flexible repayment options, making them more accessible to small businesses. Plus, the UK Government acts as a guarantor, and this means that your personal credit score will be less important.

Why does my personal credit score matter when applying for a business loan?

When applying for a loan, lenders typically consider both your business credit score and personal credit score. These scores give lenders an idea of how likely you are to repay the loan, as they indicate the level of risk involved in lending to you or your business.

However, when raising finance for a new business, lenders only have your personal credit score to use as an indicator. Your new business simply won’t have a proven track record of debt repayment.

Because of this, some lenders require a business to have been trading for at least two years before they are eligible for a business loan. This is because lenders need to assess your business's ability to repay debt based on its financial history and stability, not only your personal score.

This means that to raise finance for a new business, which often has no revenue or equipment, you will have to improve your personal credit score.

In other words, you’ll be acting as a guarantor for your small business.

The good news is that there are many ways to improve your personal credit score. One of the best ones is to download a specialised credit-building tool like Wollit.

Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies (Experian, Equifax, and TransUnion).

This builds your personal credit history and helps you improve your credit score. Eventually, a better credit history will increase your approval chances – not only for small business loans, but also for other financial products, like current accounts with generous overdraft, credit cards with long 0% interest periods, and low deposit mortgages.

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Terms apply. Results may vary. Improvements to your credit score are not guaranteed. Wollit Credit Builder plans are unregulated.