When it comes to loans for your small business, there are a few different criteria that business owners need to fulfill in order to get the best loan for their needs. Typically, lenders look for at least a few years in business, a solid financial history, and—you guessed it—a high credit score.
But why, exactly, is credit so important when it comes to securing a business loan?
Simply put, most lenders rely on credit scores to tell them whether or not you are a solid investment. After all, as the business owner, your proven history of paying back debt and managing your credit is often the best indicator to lenders about whether you will pay back your business loan, too. If you have a business credit score your lender may consider that as well (especially for medium-term or SBA loans), but more often than not they’ll focus on your personal history. If you have a good track record with other lenders in the past, your credit score should reflect that and is a better guarantee to potential lenders.
Once you’ve decided you need a business loan or a credit card, it’s time to take a look at your credit score. Is it impressive, or should you spend some time improving it before putting in a loan application?
Here are some of the most effective ways to improve your credit score and, ultimately, chances of qualifying for a small business loan.
See Where You Stand
The first step in improving your credit score is to know what it is in the first place. Take some time to check your credit report from one of the three major credit bureaus: Equifax, Experian and TransUnion and make sure that everything on your report is accurate. If there’s an error, it could drastically affect your score—the sooner you take care of it by contacting the bureau directly, the better.
You may also want to consider signing up for a credit monitoring service to stay on top of your credit score at all times. Your credit card provider can be a great place to start for free, accurate monitoring. Mint also provides regular personal credit score updates.
Once you know what your personal and business credit scores look like, and what is affecting them, you can more effectively work towards growing them.
Open a new credit card
Credit card utilization, or the ratio of your credit balance to your available credit, is a key factor of your credit score. Think about it from the lender’s perspective: Someone who uses all of their available credit may have trouble paying that debt back. As a guideline, most want to see that you’re using less than 30% of your total available credit.
If you’re trending higher, don’t worry—there are some easy ways to improve. Paying down your credit cards when you can afford to will keep your credit utilization low and help raise your score. But if you can’t pay off a little debt, consider opening a new card instead. Getting approved for a new card will increase your overall available credit, lowering your utilization ratio. Though may see a hard inquiry, gaining more unused credit to your name is worth the temporary ding.
Make all your payments on time
Since one of the top factors determining your credit score is your payment history, one of the absolute best things you can do for your credit score is to make all of your payments on time. This includes everything from your credit card payments to payments on your mortgage or medical bills.
Pay your bills in full
It may be common sense that paying your bills on time is one of the best ways to improve your credit score, but why not just make the minimum payments instead of the full balance?
While paying the minimum balance may leave you with more money in your pocket now, it can easily spiral into a cycle of debt that leads to more and more interest (depending on your terms and conditions) and leaves you in the red for years. But beyond that, paying off your debt in full is another simple way to ensure your credit utilization rate stays reasonably low. By keeping your balance as small as possible, you can keep your ratio low without opening new accounts.
No matter where you’re starting from, improving your credit is probably easier than you think. And the better your credit, the better you’ll appeal to small business lenders—and the more doors you’ll have open to you.