Key Takeaway Table
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Definition
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A credit score is a score that indicates how likely you are to pay back loans and other debts. The higher the score, the more creditworthy you are to various lenders. A score higher than 600 is generally viewed positively by lenders.
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What lowers your credit score?
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Some reasons for a low credit score include late payments, high credit utilisation, defaulting, and bankruptcy. A short credit history and multiple credit applications can also be deemed risky and can lower your credit score. Sometimes, your credit score may also be affected unfairly due to errors in your credit report.
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How can low credit scores affect sole traders?
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A low credit score will mean banks are unlikely to approve your application.. Banks offer the lowest interest rates as well as long repayment periods and high loan amounts. You can miss out on these perks if you have bad credit.
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Applying for Business Loans with a Low Credit Score
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It’s possible to get bad credit business loans from non-bank lending institutions, like unsecured or private lenders. These lenders can approve loans quickly with credit policy that accepts low credit scores or doesn’t perform credit checks. Non-bank lenders may charge higher rates and fees, provide shorter terms, and limit loan amounts to mitigate risk.
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Business Loans Available from Non-Bank Lenders
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Sole proprietors with low credit scores can apply for loans from non-bank lenders. They can apply for secured loans, invoice finance, equipment finance, and fitout finance.
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There are approximately 784,744 sole proprietors in Australia. For these individuals, business loans are an essential lifeline that can help their businesses succeed.
Since there’s no legal difference between a sole trader and their business, lenders look at the owner’s financial standing to assess loan eligibility. For banks, a low credit score is grounds for loan rejection; however, other lending institutions are willing to approve bad credit business loans.
Even though it’s possible to get a business loan despite bad credit, it’s still important to figure out what lowers a credit score, how it can affect a sole trader, and what can be done to keep your credit score high.
What Can Lower a Sole Trader’s Credit Score?
Credit scores in Australia typically range from 0 to 1200 or 0 to 1000, depending on the credit reporting agency. A score of 600 and above is usually considered ideal, indicating to lenders that you’re a low-risk borrower. With a good credit score, you can enjoy easier loan approvals with better rates and terms.
What can cause an individual’s credit score to dip? Here are some factors that can lead to a low credit score:
- Late Payments: One of the most significant factors affecting your credit score is payment history. Late payments on credit cards, loans, or other bills can lower your credit score.
- High Credit Utilisation: Using a large portion of your available credit can negatively impact your credit score. It's recommended to keep credit card balances below 30% of your credit limit.
- Defaulting on Loans: If you fail to repay a loan and it goes into default, your credit score can be greatly affected. Defaults can remain on your credit report for years even after they’re paid.
- Bankruptcy: Declaring bankruptcy can have a long-lasting impact on your credit score. It remains on your credit report for years, making it challenging to obtain new credit.
- Multiple Credit Applications: Each time you apply for new credit, a hard credit check or hard enquiry is made on your credit report. Too many hard enquiries in a short period can indicate risk, thus negatively impacting your score.
- Short or No Credit History: Having little or no credit history can result in a lower credit score since this shows lenders that you’re an inexperienced borrower and can be a potential risk.
- Closing Old Accounts: Closing old credit accounts can affect the length of your credit history and lower your credit score. A longer credit history is generally viewed more favourably.
- Errors on Credit Report: Inaccuracies or errors on your credit report, such as accounts that don't belong to you or incorrect late payment information, can unfairly lower your credit score.
How Low Credit Scores Affect Sole Traders
The biggest impact of a low credit score on a sole proprietorship is how difficult it can be to apply for loans at traditional lending institutions. Banks may outright reject loan applications, which can make businesses miss out on low interest rates, long repayment periods, and high loan amounts. This can make it challenging for sole traders to find ideal financing options for their business needs.
Since sole traders are not legally separate from their business, a low credit score also means they will have difficulty finding loans both for personal and business purposes.
A low credit score can also impact a sole proprietorship’s reputation, which can make it hard for them to make meaningful business relationships with suppliers and other businesses.
Although getting bad credit loans from non-bank lenders is possible, it still pays to keep a high credit score. With a higher credit score, you can have better loan terms and rates. More importantly, you can avoid losing out on opportunities for your business to grow and thrive.
To keep your credit score high, review your credit report and keep an eye out for any issues. Correcting any errors can help you get your score back up. Additionally, make timely payments on your credit lines and other loans.
Applying for Business Loans with a Low Credit Score
A low credit score may not get you a loan from a traditional lender like a bank, but you can still access loans from other lenders. Unsecured or private lenders understand different financial situations and can provide you with the funds you need to help you do business the way you want.
If you have bad credit, non-bank lenders will take into account other factors. They may ask for property and asset security, guarantees, financial documents, and more to ensure your ability to pay back the loan but unsecured lenders will assess based on turnover through your bank account.
Benefits of Borrowing from Non-Bank Lenders
Accessibility
You can get a higher chance of loan approval from a non-bank lender despite issues like bad credit, lack of financial documents, lack of security, or existing tax debt.
Fast Approval Process
Non-bank lenders often have streamlined application processes and quicker turnaround times compared to traditional banks, which can be beneficial if you need funds immediately.
Tailored Loans
Non-bank lenders may offer terms and repayment options tailored to your specific financial situation and business needs.
Things to Watch Out For
Higher Interest Rates
Non-bank lenders may charge higher interest rates compared to traditional banks.
Shorter Repayment Periods
Some non-bank lenders may offer shorter repayment periods, leading to higher monthly payments.
Lower Loan Amounts
Non-bank lenders may set a limit on how much you can borrow, which can be an issue if you need a larger loan.
Bad Credit Business Loans Available from Non-Bank Lenders
It may be challenging for those with poor credit to secure some types of loans. For instance, a line of credit for bad credit borrowers can be very difficult to obtain. The good news is there are certain types of loans that are easy to obtain no matter your credit, particularly loans that involve security:
Secured Loans
Online and private lenders can provide you with secured loans. You will need to provide property security, like real estate, vehicles, equipment, or other assets. The security will assure lenders of your capability to pay back the loan despite non-ideal credit standing.
Invoice Finance
Invoice finance is a way for businesses to access cash despite late payments from their customers. Once you write an invoice, you can access up to 85% of the invoice value on the same day, giving you access to funds for your operations and future contracts. Since your accounts receivable act as security for the loan, many lenders will approve your loan even with a low credit score.
Equipment and Asset Finance
Equipment finance is a specific loan solution that allows businesses to purchase expensive equipment upfront. For lenders, equipment finance is relatively low-risk since the equipment itself serves as the security for the loan. Thus, it’s easy to get approval if you have bad credit.
Let Loan Experts Guide You to the Right Lenders
Dark Horse Financial can connect you to lenders that can give you the most suitable terms and rates for your financial situation. You can get a sole trader loan with bad credit approved as fast as 24 hours. Get the funding you need to develop your business. Talk to us today.
