Credit Building > Can you get a small business loan with bad credit?

Can you get a small business loan with bad credit?

Wollit Team4 minute read · Updated 2nd August 2024

Starting a small business can be exciting until you get to the funding part. This is because securing a loan for a small business can be a real challenge, especially if you have a bad personal credit history.

However, having a poor personal credit score doesn't necessarily mean you can't get a small business loan. Let’s have a look at how your personal credit history affects your small business and what your options are.

Why do lenders care about my personal credit history for a small business loan?

The reason is simple: when you run a small business, often you’re the only person involved. Even if you have a few employees, your small business might not have enough credit history of its own.

As a result, lenders can’t assess your small business’ ability to repay the loan from its profit alone. This means that you’ll need to step in and basically be a guarantor for your business.

Your personal credit history will then be what lenders will care about, alongside other factors such as your business plan, cash flow projections, and any collateral your business might have.

What are the best alternative financing options for small business owners with bad credit?

Having a bad credit history can make it more difficult to qualify for a small business loan. Lenders may view you as a higher risk borrower, which could result in higher interest rates, stricter terms, or even rejection of your loan application.

However, there are alternative financing options available for small business owners with bad personal credit.

Here are the best ones:

The first option is peer-to-peer lending. These websites connect borrowers with individual investors willing to lend money. They’re more flexible in their lending criteria and could be a viable option if your credit is bad. The main peer-to-peer lending websites in the UK are Zopa (where you can borrow for £1k to £25k) and Funding Circle (£5k – £1m).
Merchant cash advances. This type of financing allows you to receive a lump sum in exchange for a percentage of your daily credit card sales. This can be an expensive financing option but quite accessible if you have a decent amount of sales. Some of the largest merchant cash advance websites are 365 Finance and Capify.
Invoice financing. If your business generates a steady stream of invoices, you can use invoice financing to receive a cash advance based on their value. This is another way of getting a loan based on your business’s revenue rather than your personal credit history. Two of the largest ones are Kriya (formerly MarketInvoice) and Creative Capital.
Asset-based lending. This involves using your business assets, such as equipment or inventory, as collateral for a loan. It’s basically a secured loan, and it depends more on the value of your assets rather than your credit score. The three main websites where you can apply for asset-based finance are Close Brothers, Shawbrook, and NatWest Asset Finance.

Each of these options offers something for different kinds of small businesses, and don’t involve your personal credit history. However, they all require your small business to have something substantial:

Does your business have profitable sales, despite a thin credit file? Then try something like Iwoca, where you can get "traditional" loans but much faster and easier than from high-street banks.
Does your small business have any sort of collateral? For example, if you're running a food truck you could always get financing against that.
Does your business make a lot of sales via credit card? For example, if you’re running a small online store you could get finance secured against your sales.
Does your business generate a lot of invoices? For example, let’s say you are an IT freelancer who works with big clients. You could always get financing against your invoices.
If none of these apply, you could always try peer to peer lending, but success depends a lot on the mood of the market – sometimes peer-to-peer lending is “hot”, other times not.

Will a small business loan show up on my personal credit report?

It really depends on how you structure your business and how the loan is guaranteed:

If you are a sole trader and don’t have any employees, your personal credit score is also your business credit score. Any business loan will be reflected in your personal credit report.
If your business is a limited company, the loans of the business won’t show up on your personal credit report. However, lenders might still review your personal credit report to assess your creditworthiness.
Also, if you personally guarantee a business loan for your LTD, then the loan will also show up on your personal credit report.

In short, a small business loan does not show up on your personal credit report unless you personally guarantee it.

Do small businesses have a credit score in the UK?

Yes, limited companies in the UK have a credit score that is separate from your personal credit score. This business credit score ranges from 0 to 100, with 0 being high risk and 100 indicating minimal risk. A score above 81 is considered low risk.

The main credit reference agencies that calculate business credit scores in the UK are Equifax, Experian, Dun & Bradstreet, Credit Passport, and Creditsafe – each of these has paid subscriptions where you can check your small business’s credit score. You can also check your business credit score for free by signing up to Credit Passport.

However, if you’re a sole trader, then your business doesn’t have a separate score. Your personal credit score is what lenders will look at when deciding for a loan for your small business too.

How can I improve my chances of getting a small business loan if I have bad credit?

While having bad credit may limit your options, there are steps you can take to improve your chances of securing a small business loan:

Build a strong business plan. Most lenders will want to see your business plan, even if you have collateral. Work on a plan that shows your business goals, target market, and financial projections, and show to lenders that you are a serious and capable business owner.
Seek a co-signer: If you have a trusted friend of family member with good credit willing to co-sign the loan, it can help reduce the risk for the lender and improve your chances of getting the loan.
Work on improving your business credit score if you have a limited company. You should pay your bills on time, reduce debt, and avoid making too many loan applications. Using a credit building tool like a business credit card or the Tide Credit Builder can help as well.
Work on improving your personal credit score. While it may take time, taking steps to improve your credit score, such as paying off debts, fixing errors on your credit report, and building a good payment history, can eventually open up more financing options for your business.

Improving your personal credit score works similarly to improving your business credit score: pay off debt, pay bills on time, and don’t make too many loan applications at once. Tools like credit cards can also help, although you should be careful – they come with high interest rates and low credit limits, which may eventually hurt your credit score rather than improve it.

For a safer way to improve your personal credit history, consider downloading a specialised credit-building app like Wollit.

Wollit is an app that reports your monthly subscription as loan repayment, helping you build a history of timely repayments without the risk of getting hit with high-interest charges or going over your card limit. It can even report your monthly rent payment to Experian, adding another line in your credit report that shows lenders you're responsible and pay your bills on time.