You’ve big ideas for your business. You’ve identified how much cash you need to bring the next stages of your vision to life and projected a healthy return on investment.
So, it can be somewhat deflating when you apply for a business loan and despite a strong business plan, your bank declines your application. Particularly if it’s because of past credit issues.
Thankfully, there are lots of other funding options available to help you move forward. Some alternative forms of lending to explore include;
- Securing an investor in your business
- A government-backed Start Up Loan
- Applying for a Guarantor Loan
- Exploring peer-to-peer Lending
Business finance with bad credit?
There are lots of reasons why small businesses may seek additional funding to bring their commercial vision to life.
Many new business owners require loan investment at the early stages of trading to launch their venture or even to buy into a business.
Established businesses may want to secure extra funds to scale up operations or invest in additional resources to support expanded business growth, without on-boarding commercial partners or reducing their stake in the business.
Whilst an impaired credit history can put off banking or traditional business lenders from approving your application, many alternative lenders allow people to borrow 100% of the costs you need for their business, with a loan guarantor. One of the most accessible ways to do so, is to apply for a Business Guarantor Loan.
What is a Business Guarantor Loan?
Business loans with a guarantor are typically a little more flexible than other types of business lending. They make borrowing more accessible and affordable to business owners with poor or average credit scores.
You are the main borrower and fully responsible for making the monthly repayments. The agreement is guaranteed by a close friend or family member that you trust, giving lenders comfort that they’re exposed to less risk of non-repayment.
This means that past credit issues aren’t as prohibitive to borrowing the funds you need, as they would be in a solo application.
The person guaranteeing your loan co-signs the credit agreement, stating that in the event of you being unable to pay, that they will personally meet your contractual monthly repayments on your behalf.
This is a legal, binding credit agreement, so you should be sure that you and your guarantor fully understand the implications of borrowing in advance.
Do I qualify for a Business Guarantor Loan?
The main criteria to be met when applying for a Guarantor Loan is having a trusted friend or family member with a good credit standing, who is prepared to co-sign the credit application and agreement.
As a legally binding loan agreement, they must understand that they will be responsible for repayments across the full term of the agreement, if you are unable to pay.
How common are Guarantor Loans?
Since the recession in 2008, alternative forms of credit have been increasingly on the rise for business and personal use. These types of specialist lenders or brokers are authorised and regulated by the Financial Conduct Authority (FCA), just like more mainstream personal and business loans are.
The use of Guarantor Loans has been on the rise since 2015, with numbers increasing year on year. In 2018, more than 150,000 Guarantor Loans were made in the United Kingdom alone.
What criteria does my Loan Guarantor need to meet?
When you’re considering who you could ask to co-sign your business loan, the main criteria lenders require is that they have a good, clean credit history.
All lenders work to their own different lending criteria, however typically it’s expected that the loan guarantor lives and works in the UK, or has an income from their savings, investments or benefits. Most lenders also ask that your guarantor is over 21 years old.
In terms of their relationship to you, most people tend to ask a parent, grandparent, sibling or close friend. It’s advisable that you both check your credit report before applying via one of the UK’s Credit Reference Agencies, like Clearscore or Equifax.
It’s important to point out that your guarantor can’t be someone already financially connected to you, like a spouse or a business partner. Anyone you share a bank account with can’t co-sign your loan.
To summarise, your Business Loan guarantor should meet this minimum criteria:
- A trusted friend or member of your family
- Between the ages of 21 and 75.
- Not connected to you financially, via business or personal finances.
- In good financial health and a strong credit report.
- No defaults or missed payments.
- Reside in the UK, holding a UK current account with debit card functionality.
- Have a regular an income from work, savings, investments, pension or benefits
It’s also essential that they provide informed consent to co-sign the loan.
Whilst Guarantor Loans secured on assets like property exist, there are lots of unsecured options available on the market.
Exercise caution with loans secured on other people’s property, this should be a case of last resort and both of you must enter the agreement understanding that non-repayment could mean your guarantor loses their property.
More information on business finances
If you are thinking of raising equity funding to grow your business the Enterprise Investment Scheme (EIS) offers attractive tax incentives to investors so is worth exploring.
You’ll also find a wide range of useful guides on ByteStart, including;
About the Author
This article has been written for ByteStart by Julia Brookes, freelance consultant for Now Loans, a subsidiary of Affiniti Digital Media Ltd (05180470) who is authorised and regulated by the Financial Conduct Authority (FCA) and registered under number 726074. Now Loans is a no-fee financial broker specialising in bad credit loans, and has helped tens of thousands of people get the loan finance they need.
More from ByteStart
ByteStart is packed with help and tips on all aspects of starting and funding your business. Check out some of our most popular guides;
Funding your business
- A Start-Up’s Guide to the Seed Enterprise Investment Scheme (SEIS)
- How to Maximise your Chances of Securing a Small Business Loan
- What to Do When the Bank Says “NO”
- 4 Ways to Make Your Crowdfunding Campaign Stand Above the Rest
- How to Prepare Your Business for Crowdfunding
- Equity v Rewards Crowdfunding: Which is Best for Me?
- A Guide to Merchant Cash Advances
- Revolving Credit Facility – The short term funding solution every small business owner should know about
- Invoice Finance – What is it and how can it help my business?