Featured image by Artur Szczybylo
Are you thinking of establishing a business? Your personal credit score may be an obstacle. When banks consider an application for a small business loan, they look at the applicant’s status to assess their risks. Discover the optimal score for securing business credit and learn ways to give your rating a boost.
What Is the Lowest Acceptable Score for Obtaining Business Credit?
Both FICO and VantageScore, the most popular calculation systems in the country, have a scale from 300 to 850. The higher your status, the more financing options you have and the lower the cost (i.e., interest rates). For example, the “excellent” category—between 800 and 850—automatically unlocks the best conditions.
Consumers from the next segment (740-799) are regarded as low-risk borrowers. You may also expect approval for business credit if your total is within the “good” range—from 670 to 739. But the lowest threshold for many lenders is 660, so a 640 credit score, for example, is not enough.
Understand Your Score
This metric condenses your borrowing history, and it is based on a mix of factors. The components assessed by FICO and VantageScore are similar. Making payments on time is the single most influential factor in both models, as it defines 35% and 40% of the total, respectively.
You may check your current score by going to My FICO or using apps like Credit Sesame. If the result is less than perfect, this could affect your ability to obtain business credit. However, there are many ways to boost your score. First, you need to determine if the figure is correct, as one in five Americans has skewed scores, according to the Federal Trade Commission.
Is It Fair?
To verify your credit score, collect the reports generated by Experian, TransUnion, and Equifax. Any of the documents may contain errors, such as false events or wrong amounts. You can dispute any incorrect derogatory item in accordance with the Fair Credit Reporting Act. All bureaus in the United States are obliged to accumulate only substantiated information.
Go to www.annualcreditreport.com to download the data, as this is the only officially authorized source. There is no need to pay for the service, as you are entitled to one free copy per bureau per year. What’s more, due to the pandemic, you can now obtain the files free of charge weekly until April 20, 2022. This is a great opportunity to keep track of your finances and prepare to gain business credit with good terms.
After downloading the files, scrutinize them line by line to identify inconsistencies. Here are some of the things that may tarnish your score unfairly:
- Late payments you never missed
- False events like evictions, bankruptcies, or charge-offs
- Accounts that do not belong to you
- Absence of positive information
- Identity theft
To rectify the mistakes, you need to open disputes with the bureau or bureaus involved. Note that the agencies compile data independently, so each of the reports is unique and must be disputed separately. You may deal with the paperwork on your own or enlist the help of repair agencies like Lexington Law. If the reports are immaculate, consider the rebuilding tips below.
What Are Some Top Tips to Improve Your Chances of Gaining Business Credit?
To push the total up, you should adjust the components of the calculation. In FICO, these are the timeliness of payments, the total size of the debt, the age of records, new accounts, and the credit mix. Here are three common strategies:
1. Pay Attention to Limits vs. Balances
How many credit cards do you have? The sum of their limits determines the amount of credit and your utilization of your credit. The latter is the proportion between the sum of balances and the sum of limits. The lower that proportion is, the better for your reputation as a borrower and the better your chances of obtaining business credit. Generally, experts recommend 10% or 30%, but opinions vary. One thing is certain, however. You should use as little of the available limits as possible.
If the utilization is too high, consider paying off some or all of the balances. If this is impossible, make minimum payments and work with the limits instead. You may get a new card or a limit extension from your issuer. In any case, as more credit becomes available, the ratio drops (provided you do not spend more than you used to).
2. Allow Yourself No More Missed Payments
Did you know late payments stay on your report for seven years? This is true for all derogatory marks except the Chapter 7 bankruptcy, which expires in a decade. One mistake may have prolonged implications, though. Therefore, set reminders or automatic transfers to avoid falling behind. If it does happen, but the delay is short (a few days), correct your mistake and contact the lender as soon as possible. Banks usually communicate with bureaus every 30 days, so if you act fast your payment may not show up as past due.
3. Add More Information
The Experian bureau offers a unique service—Experian Boost. This service allows you to add utility bills and some other types of payments to your report, so they are used for score calculation. On average, consumers see a 12-point increase after using this service. This is not much, but it could close the gap separating you from 670.
Plan Ahead and Improve Your Chances of Obtaining Credit for Your Small Business
While different banks have different requirements, 660 is generally considered to be the lowest acceptable threshold for obtaining credit for a small business. Check your status today and improve it if necessary. Generate new positive information to gain more points. Have any disputable information removed in accordance with The Fair Credit Reporting Act. Plan ahead and check your records early, as fixing them will take several months.