Most entrepreneurs at one point or another must search for funding to launch of grow their businesses. Startups, by nature, do not have a track record of generating revenue or profits. Nor do they have a history of repaying loans. However, individuals do.
This is why credit scores play such a critical role in small business finance. Before they will make a funding decision, lenders will assess the ability of the borrower to repay debt. With startup ventures, there is often little else to go on, other than the entrepreneur’s personal financial history. Thus, an individual’s credit score plays a major role in a bank underwriter’s decision to approve a small business financing request.
Credit Scores and Their Impact on Small Business Financing
Credit scores range from 300 (very poor) to 850 (exceptional). Obviously, anyone with a score of 700 or above, will likely have little difficulty in securing a small business loan. Conversely, if you have a credit score below 550, it will be very challenging to secure funding from a traditional lender, such as a big bank. It is not impossible for someone to secure business loans with bad credit, but it will likely be more costly because interest rates charged are higher for people who have not proven themselves to be very creditworthy.
Here are some tips for improving your credit score.
1. Review Your Credit Report — Request a free copy of your credit report and look to see if there are any errors. If you are diligent about paying bills on time, look for any late payments that might be incorrectly listed on your credit account. If you find errors, dispute them with the credit bureau.
2. Open a Business Credit Card — This strategy is appropriate for young companies that are not already saddled with credit card debt. Even if you have the cash on hand to make purchases, use your business credit card to make purchases and then pay them on time and in full. By doing so, you will establish a track record of payments, which builds your credit score.
3. Schedule Auto Payments — Entrepreneurs are busy people, and paying out money is one of the less desirable aspects of owning a company. Business owners would much rather focus their energies on running the firm than pouring over accounts payable. Scheduling pre-authorized payments to vendors eliminates the possibility of having late payments. Of course, you can only do this if you are confident that there will be enough money in the account when the withdrawal is made. Scheduling payments when funds are insufficient will hurt, not help, your credit score.
Making your credit payments on time is an important step toward improving your credit score. Many creditors and vendors enable you to sign up for payment reminders that come via text or email.
4. Run a Lean Company and Reduce Your Debt — Examine your operations for areas in need of improvement. Monitor your inventory and staff expenses to run a lean organization. Doing this will increase your company’s profitability and make it easier for you to manage debt repayment.
When trying to improve creditworthiness, one factor is to reduce your utilization rate. Hold off on making purchases that are not necessary at this time so that you do not add to the debt that your company has already incurred. Use the savings to pay down debt and ultimately raise your credit score. If you have multiple credit cards, pay off the ones with the highest interest rates first, but be sure that you are at least making the minimum payments on the others. As time goes on and you establish a track record of timely payments, your credit rating will improve.
5. Refrain from continuously opening credit cards and shifting debt — It is tempting to open new credit cards that allow transfers of debt. Often card issuers give an attractive introductory rate — sometimes zero percent interest for six months — for transferal of high interest credit card debt. The best way to improve your credit score is to pay off debt rather than switch it from one account to another. Further, if you open too numerous credit cards in a short period of time, it sends a sends a signal that you might not be a good credit risk.
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