Anyone seeking to secure small business financing knows — or will quickly find out — how important past credit history is to the decision-making process for bank underwriters. Lenders are primarily interested in whether or not the small business borrower will be able to replay to loan with interest.
For a startup or a growing company, having a good credit rating is extremely helpful in obtaining small business financing, particularly when a firm is relatively new. Aspiring entrepreneurs typically come up with great ideas or venture into an industry in which they already have experience. However, in many cases, they may not be savvy about how the small business finance process works. In fact, they may be so focused on putting together the business that they push back what is often the most important factor of success: the ability to secure enough funding to get the venture up and running.
Ways to Increase Your Credit Score
Before applying for small business financing, here are some tips for increasing your credit score:
Check Your Credit Report – Request a free copy of your credit report from companies such as FreeCreditReport.com, Equifax, and Experian. Make sure that it does not include any errors. For example, if there were tax liens that were settled months ago, make sure that the final settlement is reflected on your credit report. Look to see if there are any records of late payments and try to pay them in order to get the blemishes off your account.
Open a Business Credit Card – Having a business credit card gives credibility to a company. Perhaps the best way for a young company to establish good credit is to open a business credit card and make small purchases by using it — even if you have the cash to cover the costs. Then, at the end of the month, pay the bill on time and in full. Capital One has been aggressive in pursuing small businesses to open credit cards. They will start with a small limit and cash back options. Do this for a number of months to establish a track record of timely payments. This process will help demonstrate creditworthiness when you want to secure funding for a larger amount of money for things like real estate purchases, building renovations, equipment and inventory, and other costs associated with growing a business.
Set Up Payment Reminders on Your Calendar and Pay Bills Online – Making timely credit payments is among the most effective ways to increase your credit score. You can set up reminders on Microsoft Office Outlook or other desktop calendar or on your mobile device. Banks and creditors also frequently offer payment reminders via text or email to as a reminder when payment is due. Additionally, you can set up automatic payments through your business bank account or via credit card. Doing this will help ensure timely payments. (Just be sure you have enough money in your business banking account to cover the payment. If you go into overdraft, it will defeat the purpose and then actually hurt your credit score.)
Pay Off Existing Debts When Possible, But Do NOT Close the Account When Paid in Full – Obviously, in the early phase of a company’s history, paying off existing debts is easier said than done. However, reducing the amount owed and credit utilization (the percentage of available credit that has already been used up) will help immensely to improve your credit score. When determining which ones to pay first, look at the interest charges and pay down the ones that have the highest finance charges first. If you have finished paying off a furniture store for desks and chairs and don’t anticipate needing more for a while, simply put the card away. Don’t shut off the card. The reason is that you will have a lower credit utilization percentage if the account is open but has a zero balance.
Increasing your credit score can get you on your way to obtaining traditional bank term loans or SBA funding, which is quite helpful to new companies – particularly for startups and women-owned and minority-owned businesses. Bank loans and SBA loans will probably offer the best interest rates and terms for entrepreneurs seeking to pursue their business goals.
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