As a small business owner, you know getting a loan is tough. Many factors can prevent your company from being approved, including issues outside of your control, like macroeconomic conditions.
One thing you can expect to play a big role in whether you qualify is your personal credit. Since your personal credit score reflects your ability manage and borrow money, lenders will examine it, especially if your business’s credit history isn’t that long. Here’s how you can boost your personal credit so financial institutions can feel confident loaning money to you.
Understand what’s hurting your credit score
Under the Fair Credit Reporting Act (FCRA), you have a right to receive a copy of your personal credit report. And you don’t have to pay for it.
Each year, you’re entitled to one free credit report from the three main credit bureaus (Experian, Equifax, and TransUnion). Take advantage of this to find your weak points and check for errors.
Your credit score is created analyzing data from five major categories.
- Payment history: Making payments on time is most beneficial to your credit score. Late payments and delinquent accounts hurt your score greatly.
- Amounts owed: Also known as the credit utilization ratio, this analyzes how much you owe in comparison to the total amount of available credit. Credit issuers like utilization to be lower than 30 percent. If it’s higher, your score may be impacted.
- Length of credit history: Part of this is outside of your control, as some people don’t have a long credit history because they or their businesses are young. Just be sure to keep your old accounts open to increase your credit history. What’s also measured is how often you use accounts. For instance, by using a credit card and then paying the bill on time, you can build up your score in this category.
- Types of credit: This analyzes your mix of credit cards, installment loans, mortgage loans, and retail accounts. It’s not necessary to have all of these, but having credit cards and installment loans in good standing helps your credit.
- New credit: Don’t open new accounts too rapidly. For instance, opening several credit accounts over a month represents more risk to creditors and will lower your score.
By getting your credit card report through a credit bureau, your credit card provider (some offer free monthly scores), or a reputable website, you can identify where your problem areas are. Then, you can start taking steps to improve.
Take action to improve your personal credit score
Making payments on time and reducing overall debt is how you improve and then maintain a solid credit standing.
If you owe a lot of money to creditors, and your credit utilization ratio exceeds 30 percent, the best thing you can do is take steps to pay that down. Or if you missed a payment a few months ago, ensure it doesn’t happen again by automating the payment or changing the payment date. Deal with any past due accounts immediately.
Other courses of action depend on your financial situation. For instance, if you have a low credit score or no significant credit history, consider a credit builder loan. These are small loans made through credit unions designed to help people their boost credit standing.
Another option for those with bad credit is a secured credit card. With a secured credit card, you secure your credit limit with a security deposit. Over time, your credit score will rise as you use the card and pay your bill on time.
Also, one thing you should always periodically do, even if you have good credit, is check your report for mistakes. Inaccuracies on your credit report can hurt your chances of getting a loan (and they can lower your score!). According to the Consumer Financial Protection Bureau, common credit reporting errors to be aware of include:
- identity errors, such as incorrect accounts opened due to identity theft.
- incorrect reporting, like the same debt listed twice.
- balance errors.
If you do find an issue, FICO recommends immediately contacting the credit bureau showing incorrect info. File a dispute and get it fixed as soon as possible.
Additionally, make sure old debt remains on your report. If you’ve paid your student loans in full, you want this to show up on your report. John Ulzheimer, a credit expert, says “arguing to get old accounts off your credit report just because they’re paid is a bad idea” because these are good debts that show you can borrow money and pay it back.
In all you do, keep in mind how your credit score is calculated — and use that to your advantage. Consider your actions, and only take those which will positively impact your personal financial standing.
What should be your credit score goal?
The better your credit score, the better your rates and terms will be. With a good-to-great personal credit score, you could qualify for attractive financing options, like:
- SBA loans. These loans are guaranteed by the US Small Business Administration (SBA), which enables lenders to offer lower rates and longer repayment terms. You typically need a credit score of at least 620.
- Term loans. A lump sum of cash you pay back, along with interest, over a fixed period of time. Traditional term loans are an ideal financing option for the long term. You typically need a credit score of at least 600 to get favorable rates from an online lender, and even higher if you’re seeking a term loan from a bank.
Note: There are lots of online and brick-and-mortar lenders who work with borrowers who have lower credit scores. Some are willing to provide long-term loans, and most are willing to offer short-term loans. Rates may be higher than traditional term loans and SBA loans, but it’s still a way you can get capital for your business.
Outside of standard term loans, consider alternative options to access capital. For example, a business line of credit, which often has interest rates comparable to a business loan. If you need to buy equipment, such as computers, vehicles, or machinery, look at equipment financing options. The equipment serves as collateral, which means requirements aren’t as strict.
Get your personal credit on track to get the loan you need
With the right plan and discipline, you can improve your personal credit. And you can get a great business loan that puts you in a good position for success. Just remember that a little patience and resourcefulness may be needed along the way. A perfect credit score won’t fall from the skies overnight. But you can get your personal credit and business to where it needs to be over time.