Bad credit, or a lack of credit in general, is an issue that affects small and startup businesses across Australia. With an imperfect score, there are fewer options to choose from, with big banks stopping short of offering poor credit business loan products to borrowers.
However, it’s not the be-all and end-all. There are many specialist online lenders in the market willing to work with you regardless of struggles you may have experienced in the past. Find out more about bad credit business loans and how to get approved here.
There are several different avenues you can take as a business owner when it comes to securing financing for your business with a bad credit score. It’s important to consider your options closely to help determine which will be able to produce the best result for you. Some of the finance types you can look to take out include:
Unsecured business loans
Perhaps the fastest and simplest form of bad credit business loan, unsecured business loans are a common source of funding for Australian businesses. This is in large part due to their lack of security requirement, meaning you won’t be required to put up any valuable assets to act as collateral for your loan. Lenders are open to operators and businesses with bad credit scores, of course, and will conduct personal credit checks as well as those on your business.
There are several limitations when it comes to unsecured finance, however. Because they’re seen as inherently riskier, on top of the risk a bad credit score presents, you’re only likely to be approved up to a maximum of $30,000 (typically over a shorter loan term). This will also come with a high interest rate, resulting in a greater cost to your business to repay the debt.
Secured business loans
Attaching security to your loan is one sure-fire way to increase your borrowing power and available loan term, while reducing the potential cost of your loan. This is because, by using a valuable asset such as property as collateral for the loan, your lender will feel much safer in approving your application and granting larger loan sums.
You can use a wide range of different assets as collateral. While property is usually preferred by lenders, you may find that vehicles, equipment and savings can all serve as loan security. With secured business loans, poor credit takes more of a back seat thanks to the security, meaning your borrowing range can extend into the hundreds of thousands (although this will depend on the value of your collateral).
Line of credit
Alternatively, some lenders can offer unsecured lines of credit to businesses in this position. These are a flexible way to access funding for your business for as little as $5,000 and enable you to draw from your available funds whenever you like. In essence, you’re approved for a set amount and can withdraw funds up to that maximum at any point you need.
One of the benefits of lines of credit aside from this flexibility is that you’ll only need to pay interest on the amount outstanding on your line. They can also be revolving, meaning they can stay open as long as they’re viable. However, you may find the interest rates charged on these loans are higher than other business finance products, so you should make sure they’re the right option for you before committing.
Finally, invoice financing is a different type of finance which can be taken out by businesses who send invoices to be paid to customers and clients. This involves selling your business’ unpaid invoices to a third-party financier, who can pay you 70% to 90% of its value upfront and the remainder (minus their service fees) after their customer pays the invoice in full.
Many businesses in this position prefer invoice financing, as it not only gives them an immediate boost to their cashflow and saves on time spent chasing up paying customers but also doesn’t take credit history into account. This finance is also unsecured. However, you may find that if your client refuses to pay your financier, you’ll be forced to pay greater fees, which can potentially affect your credit score further.
Fortunately, there are several things you can do to increase your chances of bad credit small business loan approval. If you’re unsure of whether you’ll be able to obtain approval, you can look at the following pointers:
Secure your loan
As mentioned, lenders will be more willing to work with you as a borrower if you can provide asset collateral. With less risk being presented in the agreement overall, you may find your application is approved even with a very patchy credit record.
Find a guarantor
Guarantors are especially useful for bad credit startup business loans, particularly if the owner doesn’t have any business ownership experience to fall back on. This is a person, usually a close relation who can be trusted to fulfil the loan, who guarantees the repayment of the finance deal, regardless of whether the business is able to do so on their own. They add a layer of security to your loan, increasing your approval chances. If your business’ credit isn’t great but yours is, you may be asked to supply a personal guarantee as part of the agreement.
Work on your credit rating
There are many ways you can look to improve either your personal or business credit score, with the same principles applying to both. Continuing to pay debts on time, or paying them out in full, will improve your rating, while lowering available credit by reducing credit card limits and cancelling any unneeded lines can help also. Establishing credit accounts with suppliers can be a significant help to you, as it’ll increase the scope for positive credit reporting.
Pay more out of your savings
Finally, simply reducing the size of your loan by subsidising your required amount with savings will lower the level of risk your lender feels you present. As such, paying more of your funds upfront and lowering the amount necessary from your lender can go a long way towards improving your approval chances.