What is a Bad Credit Business Loan?
Bad credit business loans are a type of short-term business finance designed for businesses (and business owners) with a poor credit score or a history of defaults or dishonours. A bad credit history presents a greater risk to lenders, so interest rates will often be higher than other forms of finance.
In this guide, you’ll learn:
- How this type of finance works
- How to apply
- What you'll need if you are ex-bankrupt
- The documentation you will need to apply
- The types of assets you can purchase
- How to compare lenders, interest rates, and loan terms
How does a Bad Credit Business Loan work?
A bad credit business loan in Australia is similar to an unsecured business loan - lenders will generally look at the credit history and revenue of the business to determine whether it is eligible for a loan. They can provide access to funds when a business is unable to obtain finance approval elsewhere.
If you are approved:
- A lender will provide you with access to funds.
- You will have immediate ownership of anything purchased.
- You will make regular repayments to the lender for a fixed period of time.
In comparison to other types of business finance, bad credit business loans may have higher interest rates and fees attached to reflect the increased risk to the lender.
How do I apply?
To apply for a bad credit business loan, you’ll need to follow the same steps as with most applications for business finance. Although the available pool of lenders will be smaller than for other types of short-term business loan, you should still be able to speak to:
- Non-bank lenders
- A finance broker
- Specialist subprime lenders
A specialist lender might be the best place to start. They can generally offer you quick access to funding with the ability to lend more based on good short-term loan conduct.
Who can get a Bad Credit Business Loan?
Bad credit business loans are generally used by individuals who have either defaulted on a previous loan or have some negative history on their credit file. They can also be used by the director of a business when personal or business assets are tied up due to court proceedings - such as divorce - or if the director has a poor individual credit score.
In Australia, this type of business finance is often used by:
- 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
The qualifying criteria is similar to an unsecured business loan. Most lenders will be able to provide options if you have:
- Been trading for at least 12 months; and
- Have an ABN (Australian Business Number); and
- Are registered for GST.
However, you can still apply if you:
- Are self-employed
- Are a sole trader
- Have been trading for between 6 - 12 months
Bad credit business loans are designed to be a short-term finance solution. Just like an unsecured business loan, they’re ideal for taking advantage of supplier discounts or limited-time sales.
Can an ex-bankrupt get a loan?
Some lenders will consider applicants that have been recently 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 reflective of the increased risk to the lender.
You may also need to supply collateral, or be asked to include a guarantor on your loan.
Before you apply for a loan following bankruptcy, consider:
- How your assets and income have 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?
No lender will offer guaranteed approval on a bad credit business loan in Australia. However, there are many ways you can improve your chances of gaining approval, such as preparing a business case for how you will use the funds and how borrowing the money will help grow your business.
Providing a personal guarantee doesn’t mean guaranteed approval. A guarantee will lower the risk to the lender, but they may still assess your application only on the financial strength of your business.
What is the application process?
The process for bad credit business loans is similar to other types of business finance, but puts greater focus on your ability to prove you can repay your loan and how the money will benefit your business.
To increase your chances of approval, you should prepare a business plan to illustrate:
- How you intend to use the funds to grow or support the business.
- Financial projections for the business following funding use.
- Details of business expenditure and how you plan to successfully repay the loan.
As this type of finance presents a high level of risk to a lender, they will often will require more extensive documentation to assess your application. Here’s what you may need to provide to a lender when applying:
- Proof of identity
- An ABN and GST registration
- An acceptable credit rating - the lender will ask to conduct a credit check
- Business bank statements
- Trust Deed if the business is held in a trust
- Australian Tax Office (ATO) Portal access
- Financial records (provided by your accountant)
- Profit and Loss Statements
- Balance Sheet
- Details of the asset you wish to purchase
There are no set guidelines to qualify for a bad credit business loan. Lenders will instead assess each application on a case-by-case basis. Each lender will have different considerations when granting loan approval.
How much can I borrow?
The amount a lender will approve for a bad credit business loan will greatly depend on how much your business can afford to borrow. Depending on your risk profile and your capacity to service your repayments, you may be able to borrow between $5,000 and $150,000.
You can use the Business Loan Calculator to quickly estimate your repayments on offers available from various lenders.
This can be a good way of improving your credit score and building trust with a lender. For example:
- You 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.
Minimum and Maximum Loan Amounts
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Recent evidence of paying off outstanding debts and current debts - e.g. repaying your credit card on time - will help demonstrate your ability to service the loan amount.
What is the term?
Most lenders will offer a bad credit business loan for a term of 1 - 12 months. The shorter terms compared to other forms of business finance are due to the increased risk presented to the lender.
Minimum and Maximum Terms
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Although bad credit business loans are short-term business finance, they can give your business access to cash quickly, and can be an opportunity to demonstrate your ability to meet repayments on future loans.
What are the rates?
Interest rates on bad credit business loans can range anywhere from 15% to 35%. The actual rate applied to your loan will be dependent 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
- The length of the loan period
- The value of any deposits or security - if any - used on the loan
Bad credit business loans allow businesses in Australia to access cash that may not be available through other forms of finance.
- Gives a borrower fast access to cash
- Is often only assessed on the cash flow strength of a business
- Will likely have higher interest rates and fees than other forms of business finance
- May not require any collateral or security
- May require a personal guarantee from the director of the business
Pros and Cons
Bad Credit Business Loans FAQ
Does personal bad credit affect business loans?
Yes. However, there are different lenders who will consider your application and assess it under their individual criteria. For example, your bank may not approve a bad credit business loan based on the risk you present as a borrower, but a specialist subprime lender may approve your application based on the strength of your current business revenue alone.
Will I need to put down a deposit for a Bad Credit Business Loan?
No. In most cases, a deposit will help you get a better interest rate, and offering security - such as your personal assets - on the loan may also provide a better rate. As approval for a bad credit business loan is determined by the current cash flow of the business, you won’t be required to put down a deposit if you’re willing to accept higher interest rates or fees.
Can I use a Bad Credit Business Loan to replace existing business assets?
Yes. Bad credit business loans can be used for any genuine business purpose, including the purchase of new business assets to replace your existing ones.
What is the typical interest rate I can expect to pay on a Bad Credit Business Loan?
Interest rates will typically be higher for bad credit business loans than other forms of business finance. Unless you are able to provide collateral on the loan as security, you will likely be offered interest rates in the same area as an unsecured business loan.
What type of fees can I expect to pay on a Bad Credit Business Loan?
Fees for a bad credit business loan will vary from lender to lender. You may be charged an initial set-up fee, monthly admin fees, and more. Each lender will have different rates and fees, so it’s important to compare which is most suitable for your business and will match your ability to repay the loan.
Can I repay my loan early?
Yes. It’s highly likely you can repay your bad credit business loan early, though you should carefully read the fine print of your loan agreement to determine if there will be any extra payment charges or penalties. If there are, then it may be detrimental to your business finances to repay the loan earlier than stated.