You finally have the chance to bring your business dreams to life. You have the perfect product, the perfect place to sell it and the perfect marketing strategy. Then BAM! Your debts strike up like a ghost from your past.
To start a business, you often need access to a business bank account and potentially business loans with interest rates that won’t cripple your company. However, getting hold of either of these with a poor credit history from personal debt or insolvency solutions such as a Debt Relief Order (DRO) or Individual Voluntary Arrangement (IVA) can be really tricky.
There are companies that specialise in business loans for people with poor credit (when your credit score is negatively affected by late or unpaid payments on debt, for example), but the interest rates are likely to be much higher, and the payment terms shorter. If you can’t repay these loans, debt collection companies like PRA Group may start chasing and harassing you.
However, it is not impossible to start a business if you’re in debt. In this article, we’ll cover exactly how you can start a business if you’re in debt and your prospects for starting your own company if you have a DRO or an IVA.
How can you start a business if you’re in debt?
You can start a business if you’re in debt by getting a business bank account with an online bank that doesn’t do credit checks, getting a business loan through an angel investor, and accessing reasonably priced insurance from somewhere that will overlook a poor credit history.
To maximise your chances of starting a business if you’re in debt, create a solid business plan with comprehensive financial forecasts for any banks or lenders you approach for business accounts or loans.
Let’s dive right in, and look at everything you need to start a business if you’re in debt.
Getting a business bank account if you’re in debt
Unless you’re a sole trader with very limited transactions and activity, you’ll need a business bank account. However, as you’ll find, getting approved for a business bank account with a poor credit history from debt can be tough.
Many high-street and online banks require the director of the business to pass a credit check before they will approve them for a business account. Every missed or late payment, County Court Judgement (CCJ) action from unpaid debts, and insolvency solutions such as an IVA, DRO or bankruptcy, causes a long-term dip in your credit rating. However, all is not lost – we’ve done our research and put together a list of solutions for getting a business bank account if you’re in debt.
Online business bank accounts with no credit checks
We’ve found some great digital alternatives to traditional high street banks, and you’ll find it much easier to get approved for a business bank account with these. These accounts are fast to open and have many of the features of a traditional business bank accounts. The best thing is, that they don’t involve credit checks.
- Near 100% acceptance rates and no credit checks
- Send and receive cash in your business name
- Online banking and Mastercard debit facilities
- 1% cashback on business expenditure
- Send and receive bank transfers and pay in cash for free
- Set up Direct Debits and Standing Orders for free
- The account will be in your business’ name
- Register the account for Merchant Services & with HMRC
- Moving towards becoming a fully fledged bank: an easier route in to getting full business account
- Guaranteed acceptance and no credit checks
- Ideal for undischarged bankrupts or those in an IVA
- Send and receive cash in your business name
- Deposit cheques for free via Post Office and Barclays branches, unlike CardPlus.
- Accepts international payments
The CardOne Money alternative business account
- No credit checks
- Send and receive cash in your business name
- Deposit cheques into your bank account, unlike with Cashplus
- Easily accept international payments via online banking, electronically or as cheques.
Traditional bank accounts for people with a poor credit history
If you are still keen to get a traditional business bank account, there are a few that are designed for people with a poor credit history. They are:
Barclays Business banking account
Santander start-up business account
To increase your chances of getting approved for a business bank account with a traditional high street bank, you should:
- Create a solid business plan. At a traditional high street bank you’ll meet with a business advisor to discuss opening a business bank account. If you show them a strong business plan, with firm financial forecasts, you’ll show them that your business is viable, and that you have a good grip on the financials.
- Check your credit history. Make sure that everything is in order, and that your details such as current and previous addresses, name, date of birth and bank accounts are correct.
- Get on the electoral roll at your current address. If you’re not registered, it will be nearly impossible to get a business bank account.
- Register with HMRC (you should do this within three months of trading, anyway).
Getting a business loan if you’re in debt
Let’s look at all your options for getting a business loan if you’re in debt.
Credit score
Every adult has a personal credit score (your record of paying – or not paying – your debts on time). You usually need a minimum personal credit score of 650 or more before being approved for a loan from a traditional lender.
If you’ve been in business for more than a year, lenders will consider both your business credit score and your personal credit score.
Types of business loans for bad credit
Although it is hard to get a traditional business loan with a credit score of less than 650, there are alternative sources of credit you can consider. However, you should always make sure that your business income can pay these off on time and in full, or you’ll get in a worse financial situation than before. Here are some sources of credit you can consider if you’re in debt:
- Business credit cards. These give you access to funds and help improve your business credit score if you pay them back on time. As business credit cards have higher interest rates, especially if you have previous debt, you should use them for paying for small amounts that you can pay off quickly.
- Invoice factoring. If you’re a small business and you have unpaid invoices, you can turn these into cash with factoring. Companies will buy your unpaid invoices from you at a percentage of their value. The company will then collect the invoices from your customer and pay you the balance of the invoice minus the factoring fees. Watch out for these fees, though, and make sure they’re not too extortionate.
- Invoice financing. Instead of buying your invoices, a financing company will give you money for the value of the invoices. You then have to collect payment from your customers in order to pay back the loan and any related fees. This is obviously fairly risky, as there’s no guarantee that you can collect the payment amounts in full.
- Equipment financing; If you need to buy equipment for your business, you can purchase them through an arrangement called equipment financing, which works much the same as a car loan. You purchase equipment and pay for it in instalments with interest, and if you can’t pay it back, the equipment gets repossessed.
- Credit unions: It may be an option for you to get business credit from a credit union. These are non-for-profit organisations, where members put together their savings and resources and provide low-interest loans for their members. You must be a member of a credit union to be eligible for a loan, and you must have a business venture in keeping with the union’s common interests or concerns. You can find credit unions for bad credit here
- Angel investors: an angel investor (otherwise known as a private investor, seed investor or angel funder) is an individual who provides financial backing for small startups or entrepreneurs, in exchange for becoming a stakeholder in the company. Sometimes the angel investor might be a family member or fried. The the Angel Investment network for more information on angel investors.
Borrowing money against your home
If you find it impossible to get a business loan with debt, another option is to take out a loan against the value of your home. This may give you access to a large sum of money (over £25,000), with a long repayment plan. You may be more likely to get a loan like this with poor credit, as you are putting up your home as security. There are three main ways to do this:
- A secured loan. This is a loan you take using an asset as security against the loan: in this case, the house you own. If you can’t pay back the loan, the lender has the right to the value of your home. You should always check secured loan rates, to make sure you’re getting the lowest interest rates, and a decent repayment time.
- A further advance. In this situation, your mortgage lender may let you take on more borrowing, and additional funds are secured against your home.
- Remortgaging: in some situations, you can remortgage to raise some cash by borrowing extra money than you owe on your home.
However, borrowing against your home is really risky, as, if your business fails, you could lose both your source of income and your home. You should explore all other options first, before you decide to take out a home equity loan. You should also be aware that, if you have a poor credit history, the interest rates on your borrowing are still likely to be high, even if you’re putting up your home as collateral.
Income insurance
If you decide you have to take out money against the value of your home as a business loan, it is worth considering income insurance. If you’re self employed, and you become ill or unable to work, your business could suffer and you could be unable to repay your debts and lose your home. However, you should also check that you won’t have to pay a high premium because of a poor credit history.
Getting Public Liability Insurance with poor credit history
So you’ve secured a business bank account and potentially a business loan, only to find that you also need Public Liability Insurance. Any business that deals with the public, whether you’re a hairdresser or a convenience store, needs Public Liability insurance. If one of your clients, for example, has an accident on the premises of your business, Public Liability Insurance would cover the legal fees and compensation claims made against your business.
Public Liability Insurance is also one of those things that can be tricky to get hold of if you’re in debt, particularly if you’ve entered into an insolvency agreement such as an IVA. We spoke to insurance company Simply Business, and they said some insurance companies won’t offer Public Liability Insurance until an IVA or bankruptcy period is over. Insurance companies like Simply Business do mostly offer public liability insurance even if you have poor credit, but it might cost you more than if you didn’t have any issue with your credit history.
Closing a limited company with debts, and starting over
If you’re the owner of a limited company that is riddled with debts, you may want to close the old one and start a completely new company. To close your old company, you will need to liquidate it (this means your company will stop trading, and cease to exist).
It is against the law to close a limited company yourself, and it is not a way to avoid debt. You’ll need to acquire the services of a licensed insolvency practitioner. You may worry that, with so many debts to pay, you won’t be able to pay insolvency practitioners and liquidators, but these can usually be paid for via company assets or directors redundancy payments.
You’ll enter into a Creditors Voluntary Liquidation (CVL), where any company assets will be given to creditors, and the rest of your limited company debts written off. However, if you have personally secured any of your company’s loans (put yourself down as responsible to pay for them), you will still be liable for these. Your company’s name will be struck off the Companies House register.
After your old company is liquidated, you may want to start a new business. You’ll faced some restrictions in doing this, as the law wants to protect against directors establishing a new company simply to get out of debts. If you create a company from the liquidation of an old one, it is called a phoenix company (because it rises from the remains of the previous one, like a phoenix from the ashes). With a phoenix company, you must obey the following restrictions:
- Refrain from reusing the old company name for your new company.
- Goods and assets from the old company must be sold at the correct value (underselling assets from the old company is a fraudulent act)
- HMRC may require a Security Deposit. If your old company was laden with debts, HMRC may have reason to believe you won’t pay your taxes on time. They may ask for a security deposit, and they will use this to settle any outstanding balances.
- Difficulty accessing history. If you have a poor credit history, you may struggle to access credit for your new company.
Can I start a business if I have an Individual Voluntary Arrangement (IVA)?
An IVA is a solution to debt that allows you to pay off a small percentage of your debt (what they can afford) over a period of around five years. After this period, your debts are written off.
You can run your own business as a sole trader if you have an IVA. IVAs were actually designed with businesses and the self-employed in mind, so that viable companies could continue trading while their owners worked through debt.
However, you must get the permission of your Insolvency Practitioner (IP) before you make any changes to your financial situation. if you are starting a new company as a sole trader, it might be wise to delay your application for an IVA until you have enough evidence that your business generates enough income to support your IVA payments, plus daily living expenses. You’ll need to provide cash flow statements, business accounts and personal tax returns as proof. If you have aleady started an IVA and are thinking about leaving employment to start a new business as a sole trader, you might not be able to provide enough evidence to your IP that your new business can support your income requirements, including your IVA.
As well as your cash flow statement, you will need to provide business accounts and your personal tax returns as proof. If you have already started an IVA and are thinking about leaving your current employment to start a new business as a sole trader, it may be difficult to provide the evidence for your IP that your business can support your income requirements. You should always communicate with your IP before making any changes to your employment and financial affairs, including starting your own business as a sole trader, as they can advise you on what is possible in your personal circumstances.
Credit is also another hurdle. When you’re in an IVA, you must consult your IP before you take out more than £500 of credit. However, things can be a bit more flexible if you’re already self-employed before you enter into an IVA, and you may be able to exclude one line of credit or business bank account from your IVA, if you require this to continue trading. However, if this account is already very overdrawn, you should probably include it in your IVA agreement. The most important thing is sticking to the IVA and getting your debts paid off or written off, which will allow you to make a truly fresh start.
Starting a Limited Company
Just like working as a sole trader, if you have a limited company and an IVA, you will need to prove to your IP that you have enough income to cover your payments. It may be tough to start a limited company while you have an IVA, if the limited company is your only source of income, and it may not have built up enough income to prove that it can support your daily living needs and IVA payments. As always, check with your IP before considering changes to your employment and financial situation, as it is important to keep your IVA going and avoid bankruptcy.
Can I start a business if I have a Debt Relief Order (DRO)?
A DRO is a way to deal with your debts if you owe £20,000 or less, don’t own your own home and have no assets, spare income or things of value.
The time that you’re under a Debt Relief Order is called a ‘moratorium’. This simply means a fixed amount of time, usually around 12 months, that you have certain restrictions placed on you. During this period of time, your creditors aren’t allowed to contact you, and, when it’s over, your debts get written off. If you’re in a DRO, it can affect you starting a business in the following ways:
- You can’t apply for credit of £500 or more without letting the lender know that you have taken on a Debt Relief Order (and they are less likely to lend to you on decent terms, because of this)
- Continue to run a business under a different name to the one your DRO is under
- Be involved in setting up, managing or promoting a limited company
- If you have a business under a different name than the one you got the DRO under, you have to tell everyone you do business with the name you used when you got the DRO
- Manage a business without telling those you trade and do business with about your DRO.
You can continue to do business as a sole trader in a DRO. While any assets you own in a debt relief order must be less than £1,000, this doesn’t apply to any tools you need for your trade.
Even after your DRO is discharged, it will remain on your credit file for around six years, which will affect your ability to get a business loan from a traditional lender. However, as we covered in our section: ‘Getting a business loan if you’re in debt’, there are other options for credit that you can consider, if you know for sure that you can pay them back quickly and in full.
We’ve now gone through every detail of starting a business if you’re in debt, and we hope you’ve found it a useful read. Entrepreneurship can transform your financial future, regardless of what debt you’ve faced in the past, as long as you only take out loans that you can afford.
