But like anything involving your business, the best thing you can do before applying for a loan or any sort of funding is research and plan. The more you know about how your credit impacts your chances and what options are available to you the better off you’ll be.
But like anything involving your business, the best thing you can do before applying for a loan or any sort of funding is research and plan. The more you know about how your credit impacts your chances and what options are available to you the better off you’ll be.
Why your Credit score matters
For businesses that have been operating for less than a year, your personal credit score will be the only thing considered. And for better or worse, your personal credit score is typically tied to your business, even after you’ve established a business credit profile. This means both credit scores will be considered in a loan application if you’ve been in business for more than a year, with specific lenders weighing one profile more heavily than another.
How to improve your credit score for future loans
While you can still get a loan with bad credit (and we’ll cover how to do so in a moment), it never hurts to start planning for the future. If you want to get a loan with better terms or think you’ll apply for more funding in the near future, you need to display that you’re a responsible borrower.
Luckily, acquiring and paying off a loan or alternative funding, even if it’s not the best option available, will play into improving your credit. But to really improve your chances, you may want to implement the following ideas.
1. Make payments early or on time
Lenders are interested in how reliably you pay your bills and use it as a predictor of how likely you are to make future payments. Avoid making late payments whenever possible and bring any outstanding balances up to current as soon as possible. You won’t be able to eliminate late payments from your record immediately, but the more you can showcase responsible repayment the less impact it will have on your score.
If you’ve only recently been able to maintain regular payments, but are in good standing with your creditors and vendors, you may consider requesting their support. It can be as simple as a letter vouching for you and your business, that showcases their trust in your ability to pay.
2. Maintain a low outstanding balance
Keeping your outstanding loan and credit balances low is a good way to avoid being labeled with bad credit. Obviously, when you take out a large loan this won’t be possible, but it is a good strategy to pay-off or minimize any other debts before you take out another. There’s no magic number to keep your balances at, but instead, a ratio that lenders will look at.
Your credit utilization ratio is the amount of credit you utilize compared to the amount available to you at a given time. You can find your utilization ratio by adding up all of your debt and dividing it by your total available credit.
3. Avoid opening multiple lines of credit
One of the easiest ways to improve your credit is minimizing the number of new credit lines or loans you take out within a short period of time. Applying for credit requires a hard inquiry on your credit report.
Additionally, having unnecessary lines of credit available may also lead to excessive spending which can make on-time payments difficult to maintain. So only apply for new lines of credit or loans when it is needed.
4. Separate business and personal expenses
As mentioned before, your personal and business credit history will be looked into when applying for a business loan. But as your business becomes more established, your business credit history will carry more weight. If you have bad personal credit, it will benefit you to separate and establish a clean credit history under your company name.
You don’t even necessarily need to start with a business loan. Instead, open a business credit card and apply regular purchases, such as office supplies and utility payments to it. After a year, as long as you keep up with your payments and maintain a low balance, you’ll be in great shape to leverage your business credit history.
5. Build your team
Lenders will typically look at the combined credit history and collateral for everyone with a financial stake in a business. If you can, look to add credible business partners to your team with a clean track record. This will not only improve your creditworthiness but potentially provides you with mentors and additional leadership to help manage your business.
