What are bad credit business loans?
Bad credit business loans are a type of short-term business finance designed for small businesses and business owners with a poor credit score, a limited credit record, or a history of defaults or dishonours.
A bad credit score presents a greater risk to lenders, so interest rates will often be higher than other forms of business finance.
They are also generally offered for shorter terms and there may be restrictions on how much you can borrow with a bad credit business loan.
Bad credit business loans in summary...
- Borrow from $5,000 to $1 million
- Application assessed on the cash flow strength of a business
- Loan terms from 1 - 36 months
- Usually higher interest rates and fees than other business finance
- Providing security (collateral) can help but it’s not always required
- Available from banks and specialist bad credit business lenders
- Will require a personal guarantee from the director of the business
- Some lenders require no credit check for lower loan amounts (up to $150k)
Who is eligible for a bad credit business loan?
To be eligible for a bad credit business loan, you’ll need to meet these criteria:
- Own a business and have an ABN (self-employed individuals and sole traders may also qualify)
- Business is GST-registered
- Australian citizen or permanent resident
- Minimum business-operating time of six months (but ideally 12 months)
- Can provide business bank account statements and meet lender's revenue requirements
- Not currently bankrupt
How do bad credit business loans work?
Bad credit business loans can provide access to funds when a small business is unable to obtain finance approval elsewhere.
A bad credit business loan in Australia usually comes in the form of unsecured business finance, meaning there is no requirement to offer up an asset to secure the loan.
When assessing eligibility, bad credit lenders will generally look at the credit history of the individual and business in detail (not just the score) and the revenue of the business to determine whether it can service a loan.
Bad credit business finance is usually a fixed-term arrangement, but other ways of accessing funds quickly include invoice finance, a business line of credit and a business overdraft.
Here's what happens if you're approved for a bad credit business loan:
You will have immediate ownership of anything purchased
You will make regular repayments to the lender for a fixed period of time
You can set up the repayment frequency to suit your budget
Your interest rate will either be fixed or variable depending on the loan
Best bad credit business loan rates
Interest rates on bad credit business loans can range anywhere from 15% to 35%. The actual rate applied to your loan will depend on a number of factors, including:
- The trading history of the business
- The reputation of the business with suppliers and customers
- The credit history of the business (i.e. why are there issues and how long ago were they?)
- The length of the loan period
- The value of any deposits or security — if any — used on the loan (e.g. a bad credit truck loan where the truck serves as security may have a lower interest rate than an unsecured loan)
How much can I borrow with a bad credit business loan?
Depending on your risk profile and your capacity to service your repayments, you may be able to borrow between $5,000 and $1 million with a bad credit business loan.
The amount you can borrow is usually less than standard business loans, but a bad credit business loan can act as a stepping stone to accessing more credit down the line.
For example, it can be a good way of improving your credit score and building trust with a lender.
Here's how that could work...
- Your business wants to borrow $50,000
- A lender may only be comfortable approving a $20,000 loan
- You show that you are capable of repaying the $20,000 loan
- The lender may increase the amount of available credit for future loans at a lower interest rate
Who uses bad credit business loans?
Bad credit business loans are generally used by small business owners who have either defaulted on a previous loan or have some negative history on their credit file.
They can also be used by sole traders or the director of a business when personal or business assets are tied up due to court proceedings — such as divorce — or if the individual has a poor personal credit score.
In Australia, bad credit business finance is often used by:
- Ex-bankrupts
- Business directors involved in a Part IX agreement
- Business directors with a poor individual credit score
- Businesses where assets are tied up in court proceedings or cannot be accessed
- Businesses where there is uncertainty over the ability to repay the loan
How to apply for a bad credit business loan
The approval process for bad credit business loans is similar to other types of small business loans, but puts greater focus on your ability to prove you can repay your loan and how the money will benefit your business.
To get a business loan approved with bad credit, lenders will often require more extensive documentation to assess your application.
Documents required for a bad credit business loan
- Proof of identity
- An ABN and GST registration
- Business bank statements
- Trust Deed if the business is held in a trust
- Australian Taxation Office (ATO) portal access
- Financial records (provided by your accountant) including profit and loss statements and balance sheets
- Details of the asset you wish to purchase
Ex-bankrupt business loans
Some lenders will consider applicants who are discharged from bankruptcy, usually for a minimum of six months. There will be fewer lenders to choose from, and you should expect higher interest rates and fees to reflect the increased risk for the lender.
You may also need to supply collateral (security), or be asked to include a guarantor on your loan.
Before you apply for a loan following bankruptcy, consider:
How have your assets and income been affected by bankruptcy?
Can you show lenders that you are able to meet your repayments?
What will your repayments be and how will they work with your budget?
Are there any other finance options available to you?
Can I get a no credit check business loan?
It can be possible to get a business loan with no credit check, but generally only for smaller loan amounts (up to $150k). This avenue is only available from a handful of specialist lenders, many of which are only available to borrowers who apply through a business loan broker.
Traditional lenders usually do look into the credit history of the business and its directors when assessing the loan application.
Tony Penn, Business Finance Specialist
"Where no credit reference is required, lenders are basing the approval on a self-declaration from the director. So they're asking the customer to declare what the business is turning over on a monthly basis. The requirement is that you do sign a document for that. But essentially, it is still a low-doc, self-declaration product."
Tony Penn, Business Finance Specialist
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