How to Build Business Credit and Secure Funding with Bad Credit?

Have you ever been rejected on your business loan application? If yes, then the reason could be an incomplete financial profile, a poor credit score, and limited affordability proofs. Sometimes, spelling errors may also lead to loan rejection. Most business loan providers analyse the borrower’s potential to repay the dues. Incomplete financial information and details impact the assessment. Hence, you may face loan rejection.

Therefore, it is vital to determine the credit score requirements, eligibility, and documentation required. Plus, if applying for a business loan with bad credit, optimise the credit report. Check for delinquencies, incomplete information, and details. Re-analysing and improving these details is important to get a loan. It is critical because almost two-thirds of the UK’s SMEs never check their financial profile, according to capitalise.com.

Moreover, only 13% UK SMEs believe that they completely understand the factors influencing the business credit scores. It is too low, hence you must be active about the aspects impacting the credit score. Repaying one will help you get better interest, even with a bad credit score.

Why does Business credit score matter?

You may not know this, but a business credit score showcases a supplier’s relationship with the business, repayment potential, and even international business deals. A good credit score indicates financial reliability. It makes it easier for the business to forge new connections and get a loan. Moreover, one can negotiate better terms with manufacturers and suppliers.

It is impossible to do that with an ailing credit report. It makes it challenging for you to get loans without personal guarantees. It nearly cancels out the possibilities of negotiating the terms with suppliers and manufacturers.

For example, you need 12-month loans to split the cost of office furniture purchase into equal monthly instalments. However, you have a bad credit history. You explored the best quotes but could not find them. But when you pay some debts, report delinquencies, and update your credit report, you can see some affordable deals. It is because paying some dues improves your affordability. Hence, you may get better deals here.

Thus, business credit score matters as it helps decide the reliability and amount you can fairly get on the loan. It is the key to achieving your professional goals without roadblocks.

5 Strategies to build a business Credit score from scratch

A business credit score reveals how you handle your company’s finances. The loan providers use this information to provide funding. If you have been dealing with debts, pending supplier payments, and other debts, here is how to repair your credit score from scratch:

1) Step 1-Distinguish personal and business finances

Establishing your business as a separate, independent entity is important. You can do that by using a different bank account for company use. It helps you keep personal and business finances separate. This separation creates a clear financial history that CRAs can track. Register your company with HMRC, Companies House, and obtain a unique Tax Payer Reference (TPR).

Here are clear steps to separate personal and business accounts:

• Open a dedicated business account
• Pay yourself a salary or dividends (in personal account)
• Track business and personal expenses
• Maintain clear boundaries

2) Step 2- Establish credit and trade history

Use your business account to pay for all your related company requirements. Identify and track expenses every month. Ensure that your credit utilisation ratio never exceeds 40%. It means your business expenses must not cross the total earnings in a month. It is critical to get a loan with good terms.

3) Step 3- Establish and use trade credit accounts

Trade credit allows you to buy goods and services now and pay later. It is an excellent way for new businesses to build a credit score. It is helpful if suppliers report the payment status to credit agencies.

According to Allianz Trade Reports 2024, “businesses in the UK wait for an average of 59 days to be paid for goods and services. Contrastingly, paying suppliers timely (within 30 days) helps build a positive credit score.”

Thus, you can ask your suppliers whether they report the status to CRAs like Experian. Prioritise paying first to those who do.

4) Step 4- Monitor business credit report often

According to a survey conducted by Experian, “59% business owners never check their business credit report and score.”

It thus hampers their ability to repair credit and qualify for cheaper business financing options. Here, you must act by setting up notifications for credit monitoring. It helps you know the potential negatives, which may affect the loan approval and other business aspects.

5) Step 5- Give time and be consistent

Building credit history takes around 6-12 months. You need to be consistent with payments and ensure financial discipline. Apart from controlling business, you must monitor personal finances too. It also affects the business’s financial reliability indirectly. Moreover, ensuring a longer credit history (business and personal) helps generate trust among the loan providers. It also improves the credit score.

How to get funds with a bad credit score?

Getting a business loan with bad credit is seemingly challenging, but not impossible. Some loan providers look beyond the chequered financial history to provide funds. Here is how to get a business loan with a bad credit score:

• Understand the bad credit first

  You must have read that a 560-credit score is a bad credit score. However, in business, it is different. Individual business owners with a credit score of 40 out of 100 are considered to have a poor credit score. It could result from any financial happenings like pending payments, CCJs, missed supplier payments, etc. Thus, if your credit score is within that range, you must improve it.

• Use an affordability loan calculator

  You can check out Money.co.uk’s loan calculator to determine the loan costs. It may help you identify the expected loan rates, amount, and monthly repayments you may expect on a loan. It will help you pick up an amount that you can able to comfortably repay. It also helps you save money on unnecessary interest costs.

  Identify how much you will need for your needs.

  According to the British Business Bank, “a startup needs about £22,756 as initial funding.”

  Thus, it helps you get Small Business Loans for bad Credit in the UK without any confusion and fears. You borrow only what you need and can repay. It also increases the chances of loan approval.

• Update the documents

  Identify the documentation requirements. Generally, you must provide documents like:

  • Business plan
  • Bank statements
  • Profit and loss statements
  • Cash reserve statements
  • Tax filings
  • Revenue slips
  • Business registration proof

  Check these documents and update them to the latest terms. For example, check whether the business plan aligns with the ongoing goals. Also, identify whether you claim the rebates on time for taxes.

• Strengthen your prospects

  You can offset the risk of non-approval by improving your prospects. Here is how you can do that:

  • Ensure a detailed business plan showcasing market research, unique selling points, and pricing structure.
  • Conduct a break-even analysis of finances and revenue assumptions
  • Create a personal statement explaining your bad credit history and the steps you have taken to improve it. Provide proof of intent to pay the dues by savings, and a letter from customers to pay early.
• Consider a security-based option

  Getting a business loan could be tough with inconsistent finances. Here, you may consider getting one with a personal guarantee. You may need to prove the ability to repay the dues by providing personal or business assets as security. It could be intellectual, tangible, or in-person security on the loan. The person could be the business partner who promises to pay the dues if you cannot.

Bottom line

These are some of the steps to improve a business’s credit score and get a business loan. This roadmap will help any business owner struggling to seek finance for their needs. Identify the mistakes, report the delinquencies, and pay some debts. This may help ease the burden on the credit profile. Request updated personal and business credit reports to analyse the improvement.

Description: If you struggle to get a business loan due to bad credit, read ahead. The blog lists the aspects in detail. It will help you build credit from scratch.

Emma Parker

Emma Parker is a financial counsellor at LondonLoansBank and has been serving for over 5 years. She is a psychology graduate from the University of Glasgow. Since she has keen interest in the finance field, she pursued a diploma course in banking and finance that led her to opt for her current career. She assists people choose the best loan based on their current financial situation and credit score. As Emma understands how people react to money problems, she gives them a helping hand to solve their financial complications.