Business Insights CreditorWatch Small Business SMEs
7 mins read

Business loans for bad credit – three ways to get approved in Australia

Whether you’re seeking a long-term business loan or a small loan to start a business, having a less-than-stellar company credit history can feel like a life sentence. However, there are options available to business owners that could be worth considering, to improve the likelihood of approval for a loan or line of credit and improve your business credit score. 

What is a credit score? 

A credit score is a numbered measurement of your individual creditworthiness, or the creditworthiness of a business. This represents how risky you are perceived to be as a borrower by the credit reporting body. It is based on the repayment history of the individual or business, with these details outlined in a credit history and credit file. 

What this means for business owners is that if you have a credit score that places you in a ‘poor’ or ‘bad’ tier of risk, it may inhibit your ability to gain approval for credit products, like a business loan. 

What is considered a ‘bad’ credit score for a business? 

As a credit reporting agency, CreditorWatch offers business owners the highest quality company credit reports, which illustrate essential information about the credit risk of trading partners. This includes CreditorWatch’s RiskScore, which calculates a numerical credit score between 0-850. The higher the score, the greater the chance of approval for a business loan. 

In this instance, a bad credit score for a business could be as low as 100-200. 

RiskScore also ranks entities based on their level of riskiness with our categorised credit tiers ranging from A1 to F. These risk ratings are based on the business’ likelihood of default in the next month and are graded from very low risk to highly likely to default. 

According to CreditorWatch’s RiskScore, a bad credit score for a business could be one that sits in the E to F category, as illustrated below: 

Credit Rating Risk Category Recommendation 
A1, A2, A3 Very Low Entity has a very strong aptitude to meet credit commitments. Extend terms within consideration. 
B1, B2 Low Entity has a strong aptitude to meet credit commitments. Unfavourable economic conditions may lead to a weakened capability to meet financial commitments. Extend terms within consideration 
B3, C1 Neutral Entity currently has the aptitude to meet credit commitments. Unfavourable business, financial, or economic conditions may impair ability to meet financial commitments. Extend terms and monitor ongoing payment behaviour. 
C2 Acceptable Entity has an adequate aptitude to meet credit commitments. Unfavourable business, financial, or economic conditions will likely impair the capacity or willingness to meet financial commitments. Extend terms, closely monitor ongoing payment behaviour.  
C3 Borderline Entity is vulnerable and the aptitude to meet credit commitments is dependent upon favourable business, financial, and economic conditions. Trade with caution, closely monitor and consider your payment terms.  
D1, D2, D3 High Entity is currently highly vulnerable. COD trading is highly recommended. 
Impaired Entity is currently highly vulnerable to non-payment and default. Trading eligibility must be considered. 
Default Entity has become insolvent or does not have the ability to trade.  

What are the consequences of having a bad business credit score? 

Limited business loan options 

Having a poor credit score can restrict the business loan options available to you – particularly from the big four banks. However, that doesn’t mean you won’t find a lender or loan option willing to provide business loans for bad credit. 

Banks and lenders look at your business credit score as a measurement of your ability to service the loan repayments. The lower risk you pose to the bank or lender, the higher likelihood you’ll be approved.

To gain approval for bad credit business loans in Australia, you may instead need to consider alternative options to present the business, and its directors, as ideal borrowers. 

Some lenders look at the financial standing of the business, as well as its directors, in addition to its credit file when performing due diligence. This means that a bad business credit score doesn’t necessarily mean you cannot get a loan. If the personal credit score of the directors of the business are healthy, lenders may factor this information into the application. You may even consider looking at non-bank lenders, and other competitors to the major institutions, who are willing to consider your business loan application.  

Higher chance of loan rejection 

It’s worth keeping in mind that bad credit may also limit businesses from being able to gain approval for business loans, or lines of credit full stop, particularly with major institutions with strict lending requirements. If you have a history of poor payment behaviour and adverse events, such as payment defaults, court judgements, or overdue accounts listed as infringements, this will lower your credit score, and reduce your likelihood for approval. 

Limited ability to gain new suppliers and partner 

Additionally, having a bad business credit score could limit your ability to secure new trading partners or suppliers. As part of good credit risk management, a business will generally run a credit report on a prospective client. If there are any risk indicators or red flags, such as a poor company credit score, new entities may be hesitant to work with your business or offer you credit.  

What business loan options are available to a business with bad credit? 

Here are some options for how to get a business loan in Australia when you’re struggling with a bad business credit score: 

Secured loans 

To increase your chance of approval, it may be worth considering a secured loan as opposed to an unsecured loan. Secured business loans refer to when the borrower uses an asset, such as a property, as collateral to secure the loan. In the event the borrower were unable to meet their repayments, the lender could seize the asset to reclaim its losses. This additional level of security can help to reduce your riskiness as a customer, and may be one option to help you get a business loan with bad credit.  

You can also boost your application by providing the lender with a business plan, business financials and forecasts, that showcase you can comfortably service the loan repayments. This may help increase your chances of loan approval. This option could be ideal for businesses seeking a lump sum amount, and that have budgeted and forecast to afford loan repayments. After all, if you were to default on the loan, the lender could seize your asset to cover the lost funds.  

Pros: 

  • Increases your chance of business loan approval 
  • Offered by large institutions  

Cons: 

  • If you default on the loan, the lender will seize your asset(s). 
 Invoice finance 

Another option to gain access to funds and boost your cash flow is to consider invoice finance, also known as factoring. This is the process of selling some, or all, of your accounts receivables to a third party factoring company. This company will take on responsibility for debt collection and management of the debt. It will provide you with the outstanding invoice payments (typically up to 80% – 90%), minus any fees. 

This may be ideal for seasonal businesses, or smaller businesses looking for a cash injection to get them through a period of stagnant cash flow. It may be viewed as a small loan or an urgent loan. As the funds are based on the value of your outstanding invoices, you may be limited if you’re seeking a significant lump sum payment.  

Pros: 

  • Access to money so your cash flow stays smooth and even 
  • Bad credit is not a hindrance 

Cons: 

  • Only provided to the value of your invoices, so if you need a large sum, you may come up short. 
 Non-bank lenders 

Major institutions tend to have strict lending criteria around credit scores, so it may be worth considering a non-bank business loan lender instead. Non-bank lenders are those that do not carry an Authorised Deposit-Taking Institution (ADI) licence, and are therefore not authorised to accept deposits – meaning they cannot offer bank accounts, savings accounts or term deposits.

However, they still follow all the same regulations set by governing bodies like the ACCC and ASIC, and are often funded by the major institutions.   

To compete in the business loan market, non-banks may offer customers who do not meet the standard criteria set by big banks an opportunity to gain access to credit. They also generally offer customers lower interest rates and fewer fees to entice them onto their books. However, if you have extremely bad credit, you may not qualify for these highly competitive rates.   

Many non-banks are also online based, making the application process easy, and usually with same-day approval.   

Pros: 

  • Chance of approval, even with bad credit 
  • Option to choose unsecured loan  

Cons: 

 

Note: It is important to keep in mind that if a lender is offering you a business loan with “guaranteed approval” and “no credit check”, this may be too good to be true, as regulation in Australia requires the checking of business credit scores for all credit products.  

How can you improve your business’s credit score?      

Applying for a business loan with bad credit may make it more likely your application will be rejected, particularly if you’re applying with a major institution. Rejections could be listed on the company credit file and could further hurt the business credit score.

If your business is struggling with bad credit, it may be worth focusing on boosting the company credit score before you apply for another loan. 

Check the report for errors 

Errors can occur, so it’s crucial that you regularly request a copy of your business credit report and ensure that the information provided on your file is accurate and relevant. Should there be a mistake, such as the credit history of a similarly-named business listed, be sure to flag it with the reporting body immediately.  

Improve your Accounts Payable 

As your business credit score is impacted by your ability to make payments on time, it may be worth focusing on improving your accounts payable first. This may include setting up accounts software, like Xero or MYOB, so you know when your bills and invoice payments are due. Consider setting up automated payments as well, so you can set-and-forget this aspect of the business. By using modern software, you’ll also gain the benefit of being better able to track your cash flow, so you can identify where you struggle to make repayments.  

Late payments that are registered against your business, such as invoices owed or ATO tax debt, will always lead to the deterioration of your credit score.  

Pay off your existing debts  

If you’re applying for a new business loan when you have outstanding debts weighing you down, it will be challenging to gain approval regardless. Having multiple outstanding debts, such as a maxxed-out business credit card and existing business loans, can reduce your credit score. Lenders will also assess the business’s ability to meet new loan repayments based on its revenue and profit forecasting, minus any existing debts. Take time to pay off any existing debts and this will help to improve your business credit score.  

 

Speak to our team of experts at CreditorWatch today to discover more about your business credit score, and how to check and monitor the credit risk of clients, trading partners, and suppliers. 

small business SMEs
Michael Pollack
Head of Media & Communications
Michael joined CreditorWatch in July 2021. He has more than 20 years’ experience in business journalism, marketing and communications strategy and digital content development. He is passionate about communicating to the business community how CreditorWatch’s product suite can help them grow and protect their companies.
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