When you want to start, grow, or save your business but don’t have enough cash on hand to do that, it’s a good idea to looking into small business loans. Most small business lending companies look at a variety of factors when coming to an approval decision for small business loans: cash flow, collateral, history, and your personal credit. That’s right, even though your business’ finances and your own are usually completely separate entities, your personal credit is a factor in getting approved for small business loans. This is particularly the case if you’re applying unsecured business funding, since unsecured business loans offer no collateral that can be collected to recoup the money if you can’t pay it back.
Don’t lose heart if you have a less than perfect credit score. Some lenders will still extend loan to your company if you have bad credit, just with increased financing fees. If you don’t want to pay higher finance charges and you have a bit of time before you need the money, another option is to bring your credit score up. Here are a few tips funding experts offer for strengthening your credit score, so that you qualify for a small business loan:
- Improve your credit utilization. One of the biggest factors that the credit bureau uses to determine your score is your credit utilization. This number is a comparrison of your total debt verses the total credit you have available. The best credit scores come from people who have a credit utilization rate of greater than 0% but lower than 20% of their available credit. If your credit utilization rate is higher than 50% at any point in the course of the billing cycle, your credit score will be dinged.
How to Fix it: Ideally, pay off your debt. If that isn’t possible, you can increase your credit limits, to improve the ratio. If you have a credit card you don’t use, keep it open. The unused credit limit improves your credit utilization rate.
- Leave your credit alone! Every inquiry to the credit bureau is reflected on your credit report. If you apply for a credit card just to get a great promotional deal on a grill for memorial day, it can ding your credit.
How to Fix it:If you are focusing on increasing your credit score to get approved for a small business loan, don’t apply for any other credit card for three months before submitting the application.
- Keep an eye on your credit. Pull your credit report a few month before you actually need it. The codes associated with your credit score will give you an idea of any action you need to take to improve your score before applying for a small business loan.
If you are ever denied credit, the creditor is required to show you the credit report used to make the decision, thanks to the Consumer Protection Act of 2010. This helps you ensure that the information reflected on the credit report pulled is accurate and matches the report you’ve pulled for yourself.
How to Fix it: Regularly take a look at your credit report and make changes based on what is reflected on it.
Tell us what your think! What helped you improve your credit score? We’d love to hear your input in the comment section!