How to Fix Your Credit for Business Loans
Many people today require a serious infusion of cash to jump-start their business dreams. Cash infusions come in many forms, with business loans representing the most common source of financing for a start-up company. Most traditional lenders, such as commercial banks, make 700 the minimum credit score for small businesses to receive consideration for loan approvals. What happens when your credit score falls below 700 and lenders are the only option for growing your small business?
The method for fixing your credit for business loans follows most of the time-tested measures you would take to fix your personal credit.
Factors that Influence Business Credit
Unlike established, large corporations that have strong credit ratings, lenders judge small business owners on the merits of personal credit ratings. Several factors come into play for small business owners that want to receive cash by receiving business loans.
Both your personal and any existing business credit scores you have will rank at the top of the list for factors that determine your business credit worthiness now or in the future. You can expect a judgment on your credit report to drive down your credit score. If you already have a business, the longer your business has operated profitably, the more likely a bank is to extend you business credit. Most lenders like to finance loans for businesses that have operated for at least 2 years. Annual will also revenue play an important role in determining business loan approval, as does small business cash flow. A lender is more likely to approve a small business loan if a business demonstrates a healthy cash flow. Finally, most lenders require some type of collateral, whether it’s a chunk of real estate or another type of hard asset.
How to Improve Your Credit Score
Since improving your credit score is the most important factor in obtaining a business loan, let’s review the ways you can push the credit score needle higher.
- Reduce Your Debt
Large amounts of debt damage the chances of consumers receiving personal loans. However, debt is the deal breaker for businesses in search of loans. Lenders like to throw around fancy words like liquidity, but all you need to know is lenders never lend money to businesses saddled with debt. How can you expect a lender to finance your business, when bank loan officers see most, if not all of your revenue goes towards paying off debt? Reduce your business debt and watch your loan approval chances increase. This also means stop applying for new credit lines.
- Closely Monitor Credit Report
The three major credit reporting bureaus-Equifax, Experian, and TransUnion sometimes make reporting errors that negatively impact consumer credit scores. Review your monthly credit reports to ensure all of the information is correct. Contest any account reported that you never opened. More important, challenge a judgment on your credit report that goes back more than 10 years. According to credit reporting law, even a bankruptcy shouldn’t appear on your credit report if it happened more than 10 years ago. Minor credit blemishes should disappear on your credit report after seven years.
- Open a Secured Credit Card
Signing up for a secured credit card helps you move back up the credit score chart. Secured credit cards require deposits that lenders use as collateral to protect against defaults. You typically can only charge a maximum that equals your credit card deposit. After making consistent payments over the course of several months, most lenders increase your credit line, without asking for more deposit money. Eventually, your consistent payment record reflects in a higher credit score.
- Avoid Collections
You must resolve any credit disputes you have with credit card companies and other lending sources. Once a credit dispute moves to collections, credit reporting bureaus immediately slash your credit score. Lawsuits and credit judgments represent major blemishes that prevent you from securing a business loan. Do everything you can to prevent collections from ever happening in the first place.
Most business owners rely on loans either to start up an enterprise or expand operations. The fact that debt finances most small businesses means you need to take steps to fix your credit to obtain approval for a business loan. Remember too that little things that you might not think about, like such as closing a credit card account, can damage your credit score.