Guide to self-employed loans with bad credit

There are more than four million self-employed workers in the UK, and many of them will require extra funding to support their business at some point in time.

Unfortunately, due to erratic income, the self-employed often have bad credit, which makes it more difficult for them to borrow. So what can these entrepreneurs do? Read on to discover everything you need to know about loans for self-employed with bad credit, and how to secure the funds you need.

What is bad credit?

The term ‘bad credit’ refers to a person’s history of not paying bills or loan repayments on time and the increased likelihood that they will fail to make timely payments in the future. In practice, bad credit really means a poor credit score – the calculation that lenders use to determine the default risk of any borrower. Most UK self-employed workers are sole traders, freelancers, and gig workers. When they want to borrow money, lenders will typically check their personal credit score, (although some sole traders may also have a business credit score which is different from a personal credit rating). 

If your score is too low – defined as having ‘bad credit’ – it can be more difficult to borrow money, especially at competitive interest rates. 

How does bad credit work for the self-employed?

In the UK, most credit scores are provided by the big three credit rating agencies – Equifax, Experian and TransUnion. They hold credit records on most of the adult population and whenever a self-employed worker applies for credit, the lender will usually ask for a report from one or more of these agencies. Your score will usually decide if you can borrow any money, as well as the interest rate and fees you’ll pay, and, depending on the loan you are applying for – maybe you’re buying or leasing a new van for example – the size of the deposit you must provide. 

So how does bad credit work for the self-employed? Each credit agency has their own scoring system. A poor credit score with Equifax is under 438, while TransUnion categorises a poor credit score as being between 551-565, and a ‘very poor’ rating is 0-550.  A very poor credit score with Experian is between 0-560, and a poor credit rating is between 561-720.

What does it mean if your score is in the poor or very poor category? It means securing a self-employed business loan will be more challenging, but it’s not impossible. Specialist loans for self-employed with bad credit are available – see below to find out more. 

Why is my personal credit score bad?

Many business and financial activities can affect your personal credit score. The most common reasons that the self-employed end up with a bad credit score are:

  • History of missing loan and bill payments when they were due
  • Too much debt already
  • Applying for too many loans in a short time period
  • One or more County Court Judgements (CCJ) for debt default against your name
  • Little or no credit history
  • Moving home frequently 

How can I improve my personal credit score?

Unfortunately, despite big promises from the many ‘fast credit repair’ businesses you may see online, there is no quick fix for a poor credit score. It takes time and good financial management to get a poor score back into the good category. Key actions to improve your credit score include:

  • Pay bills and loan repayments on time
  • Reduce your debt levels and only apply for credit when you need it
  • Pay off any debts that are subject to a CCJ
  • Start to build a credit history – taking out a business credit card is a good place to begin
  • Keep old credit accounts open, even if you rarely use them – it helps to grow credit history
  • Move home less frequently – lenders like to see at least two years at your current address

Can I get a business loan with bad credit as a sole trader?

Probably. Even if you have bad credit, or if you’ve been turned down elsewhere, it may still be possible to secure the funding you need. 

Note that business loans for self-employed or sole traders with bad credit will usually incur a higher interest rate, and the sum you can borrow may be smaller. You may also have to put down a larger deposit. Alternatively, you can boost your chances of securing finance at lower rate and with a higher loan amount by adding a guarantor to the transaction – this is a colleague, relative, or friend who has good credit and agrees to guarantee loan repayment in case you default. You can also provide security in the form of a lien against property you own outright or are currently buying, or you could consider taking out a new commercial mortgage on a business property you own. 

What can I use my self-employed loan for?

You can use a self-employed loan for almost any business purpose: Buy inventory to expand your business. Purchase new equipment or vehicles. Pay taxes and VAT. Use the loan as working capital to pay regular bills, wages, and business rates. Or simply use the funds to pay off other more expensive loans and consolidate your business borrowing.

What evidence do I need for my self-employed loan?

Most self-employed loan providers will ask to see your past two or three years’ trading accounts and tax returns, plus the last six months bank statements, a list of your major customers, and information on any existing loans or major outstanding debts. 

Compare your options with Swoop

Loans for self-employed with bad credit are a specialist financial area, with every lender having their own criteria and differing rules of application. Self-employed and sole traders seeking this type of funding may find themselves forever searching and making applications to lender after lender. The delays this can create could cause you to lose revenues or leave your business vulnerable to a damaging cashflow crunch. Instead, working with a broker, who can access self-employed loans from a wide range of lenders is a better way to go. No more cold calls and endless demands for information, simply tell us what you need and leave the rest to us. 

Register with Swoop to find the best rates, the best terms and the best loans for the self-employed.


Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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