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How to obtain a business loan if you have bad credit

Sean LaPointe

If you are starting a business, it’s likely you’ll need business loans or personal lines of credit to set things off. However, if you have a bad credit score, perhaps due to missed mortgage or credit card payments in the past, you might find it difficult to access a loan to start your business. Most lenders are extremely cautious when it comes to lending to companies or individuals with bad credit.

However, the good news is that are still ways you can get a business loan even if you have bad credit. Let’s take a look at some of them.

Get a guarantor

A guarantor is an individual who guarantees that your loan will be paid in the event that you are unwilling or unable to do so. Having a guarantor vastly improves your chances of getting a business loan even if you have a bad credit rating. Through this person, you are essentially providing a backup for your loan payments, which is something that lenders look upon quite favourably as it doubles their chances of collecting their money if you, as the borrower, encounter any problems paying back the loan.

Naturally, it’s preferable for your guarantor to have a good credit rating.

Find an angel investor

An angel investor is a high-net-worth individual who is willing to invest in a promising entrepreneurial business, directly or indirectly, in return for equity in the company or repayment with interest in the future. Angel investors are usually less interested in your credit history than they are in you promising and feasible business idea, increasing your chances of securing funding from them.

Alternatively, rather than directly funding your business, an angel investor can pledge suitable assets as collateral for the loan. In such a scenario, you may easily be able to convince lenders to give you a business loan even if your credit history and score is not the best.

Find a trusted partner (with good credit) to apply for the loan

If you have a smart business idea, you might be able to convince a trusted partner (your spouse, a close friend, or a family member) to apply for the loan on your behalf. You could offer them an incentive in the form of a profit share or equity in the business.

The person who applies for the loan does not necessarily have to be involved in the day-to-day running of the business. You, as the individual with bad credit, will be in charge of the company while you are trying to repair or build up your credit score. If your business is a success, you’ll be able to fully repay the person who took out the loan to fund it.

However, you’ll need to select your trusted partner carefully. If it is someone with whom you have a close relationship, you run the risk of acrimony if you are unable to pay the loan on time and they get into trouble with the lender. If you would be uncomfortable making a trusted partner responsible for the payment of your business loan, you might like to consider asking them for a personal loan. That way, the loan arrangement is kept between you and the trusted party and avoids the pressure of involving a lender.

Find lenders who lend to people with bad credit

Not all lenders out there actually dismiss individuals with bad credit. Some are more than willing to advance loans to you even if you have a less-than-perfect credit score. Some lenders in the UK that may be worth looking at include Liberis, Aspire, Clear Funder, Fleximize, and Cube Funder.

Although the criteria and the terms for bad credit business loans vary from one lender to another, the approval rate is quite high. The major downside is that most of these loans come with significantly higher interest rates and fees than conventional loans. Therefore, before you apply for such a loan, conduct a throughout assessment of the associated costs and the expected impact on your cash flow to help you decide if it’s worth it.

Final word

A bad credit score or credit history does not have to destroy your dream of starting a business. The are several practical ways of obtaining a business loan even with bad credit. Of primary importance, however, is to ensure that even as you attempt to secure a loan with bad credit, you are actively taking steps to improve your credit score to make getting a business loan easier in the future.

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