Need a business loan but you've got a sketchy credit history? Start here
If you’re a small business owner who has explored the possibility of using a business loan to scale or improve your operations, you probably know the importance of your credit score.
Lenders, such as banks or online lending companies, want to know that you are creditworthy before extending you thousands (or even millions) in small business financing.
That’s why they review both your business and personal credit scores during the application process. The better your credit score, the better your loan offer.
So, business owners who want the most affordable business loan possible may need to clean up their credit scores before they submit their applications. There are more factors than you might expect that contribute to low credit scores.
Though your business and personal credit scores are different numbers that refer to different credit histories, you can apply many of the same tactics to both your business and personal finances.
If one score is low (or if both are sub-par), use these tips to address your credit issues and see a score improvement.
1. Separate your business and personal spending
The first step to developing a solid business credit score is to make sure that you’ve separated your business and personal spending—and that anything you buy or finance on behalf of your business goes under the former, not the latter.
To start building business credit, you can apply for an Employer Identification Number(which is required of any business with employees, for tax purposes) and/or register your business with Dun & Bradstreet, the business credit bureau.
You should also open a business bank account and get yourself a business credit card, so no purchases you make for your business end up going on your personal financial ledger.
Not only does separating your business and personal spending make good accounting sense, but it’s the fastest way for a new business to build a business credit history before getting a loan.
2. Lower your credit utilization rate
One of the most important factors that credit bureaus consider when assessing your credit score is your current credit utilization rate, or ratio. This is a measure of how much of your available credit you’ve already used.
Let’s say you have just one line of credit—a business credit card, with a $10,000 spending limit. If you carry a balance on your card that approaches that $10,000 limit, your credit utilization rate will be distressingly high.
High credit utilization rates scare lenders because it demonstrates that you are already carrying a fair amount of debt that you’ll need to repay before you get around to repaying any new financing. Your credit score can be affected by the type of debt as well so it is important that you make payments on time.
A credit utilization rate over 30% (so in the above scenario, anything over $3,000 of your $10,000 limit) is often discouraged.
There are two common ways that you can lower your utilization rate:
Pay off your existing debt: An obvious solution, but the less debt you owe to creditors, the lower your utilization rate. Getting into the habit of paying down your credit card bills is good policy anyway—and even a little bit at a time, as your budget allows, can help keep your utilization rate down.
Add another line of credit: If you get a second business credit card or open up a business line of credit, you’ll have more credit available, making your existing debt seem like less of an issue in comparison.
3. Settle current collections accounts
If you have unpaid accounts that are in collections, your credit report will suffer. But you can often reach out to the collections agency in question and attempt to settle and remove those dings with a lump sum payment.
Not every collections agency will agree to a pay-to-delete settlement. But if you are able to pay off those debts and have them listed as “satisfied” or “paid as agreed,” your credit score may improve.
You may have an uneven credit history, but if you’re on the right path now, you don’t have to let those outdated unpaid accounts languish on your report. See what you can do to make them right.
4. Use credit monitoring to catch errors
If you don’t use credit monitoring to review your credit reports, now is the time to start. Most of the major credit bureaus, such as Experian, offer this service.
Just as legitimate unpaid accounts can hurt your credit score, so too can misreported accounts, inaccurate hard credit pulls, and other mistakes on behalf of vendors and creditors.
Don’t just assume that the credit bureaus have it right. An error or two might be enough to drop you from one credit “band” into a lesser tier (from excellent to good, or good to average). You can get in touch if you see a mistake and have it rectified quickly.
5. Establish trade lines with your vendors
Unless you’ve been using business credit (in the form of your business credit card or a number of business loan options) for some time, your credit history might be lacking.
One easy way to add additional positive history is to talk with your existing vendors and suppliers about establishing trade credit with them. Offer to put down a deposit with hesitant vendors, or approach those that you already have a strong relationship with.
As long as you’re able to report your positive payment history with the vendor or supplier afterwards, it’s worth the investment of your time and your money.
6. Put bills in your business’ name
Looking for more ways to build credit history? As mentioned above, your personal and business spending should be separate—and if you have any business assets that are under your name, they should instead be under the business’ name.
This could include vehicles, cell phones, and other business equipment. It could mean your business’ utility bills, such as electricity. If you are financing the purchase of your equipment—a new point of sale system, or piece of heavy machinery—make sure to use your DUNS number (from Dun & Bradstreet) and your federal EIN so payments are attributed to your business credit history.
Since you’re going to continue paying your cell phone bill as well as pay off your financing deals for important business assets, this is a great way to build business credit while not putting in any extra effort.
Clean up your credit for a business loan: Takeaways
Cleaning up and improving your credit history isn’t a one-time fix. Once you recognize the importance of having a strong credit report—both business and personal — it’s up to you to continue the responsible practices of paying down your debt on schedule, maintaining a variety of credit lines, and keeping your business and personal spending separate.
While your credit score isn’t the only factor that affects your ability to get a loan, it’s arguably the factor that is most within your means to control. Stay the course here and you’ll be rewarded with lower interest rates, longer repayment terms, and overall better loan options.