Being rejected for a business loan isn’t just embarrassing — it can make starting, expanding or maintaining a small business that much more difficult. Although any number of factors, like insufficient collateral or business credit history, might cause your application to be declined, a common reason is a low credit score.
It’s also one of the most straightforward to correct. It won’t happen overnight, but there are things you can start doing today to raise your credit score to where it needs to be to qualify for business startup funding.
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Two Types of Credit Scores
As an entrepreneur starting a small business, you’ve got two types of credit score to worry about: business and personal. The earlier you are in the process of getting your startup company off the ground, the more your personal credit history matters when seeking a small business loan.
The first step to improving your scores is understanding how they’re determined.
Personal Credit Score
Personal credit scores come in several varieties, but FICO Scores, calculated using a model developed by Fair Isaac Corporation, are the gold standard lenders use to determine your creditworthiness. Each of the major credit bureaus — Experian, Equifax and Transunion — has its own FICO scores.
The scores range from 300 to 850. A “good” score falling in 670-739 range is typically the minimum required to qualify for the best rates on loans and credit cards.
Several factors influence your personal credit score, and some are weighted more heavily than others:
- Payment history: 35%
- Debt to credit ratio: 30%
- Average age of your open credit accounts: 15%
- Credit mix: 10%
- Recently opened accounts: 10%
Business Credit Score
Business credit scores are more complicated than personal ones are, but they work in a similar way in that a core group of credit bureaus compile your business credit history and issue the scores. There are several types of business credit scores:
- FICO: FICO LiquidCredit Small Business Scoring Services scores range from 0 to 300, and they’re impacted by your personal credit history as well as your business credit history and financials. This is the score the Small Business Administration uses to prescreen applicants for certain guaranteed loans.
- Experian: Experian’s Intelliscore Plus scores range from 1 to 100. The types of accounts you have, recently opened accounts and your company’s financials and repayment history all factor into the score. One Intelliscore Plus version also takes your personal credit history into account.
- Equifax: Equifax small business credit risk scores range from 100-992 for the financial services version and 100-816 for the suppliers’ version, and they’re comprised of your banking and leasing payment history and, in some cases, your firm’s principals’ personal credit histories.
- Dun & Bradstreet: Dun & Bradstreet’s PAYDEX score ranges from 1-100, and your payment history is the sole factor considered. On-time payments only earn you a score of 80 — to score higher than that, you’ll need to pay your bills early. Pay 15 days late, and your score drops to 70, which puts you squarely in the medium-risk category. PAYDEX isn’t Dun & Bradstreet’s only credit product, but it’s a good place to start.
9 Tips to Raise Your Credit Score
There’s no quick fix for damaged credit, but you can minimize the time it takes to see improvement by identifying — and then correcting — the issues preventing you from qualifying for business funding.
1. Check Your Credit Report
Your first step should be to check your credit report for errors and old collections you might’ve forgotten about. You’re entitled to one free report per year from each of the three credit bureaus. A combined report, which includes reports from Equifax, Experian and Transunion, is available from AnnualCreditReport.com.
2. Clear Up Your Report
In the event you find errors or unpaid collections, dispute the erroneous information with the credit bureaus that report it. And pay up old collection accounts — after contacting the collection agencies to negotiate the removal of the derogatory information in exchange for repayment in full.
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3. Check Your Personal Credit Score
Purchase your personal FICO score from Fair Isaac. In addition to giving you a baseline you can use to track your progress, the report will tell you what factors influenced your score.
Note that the free scores you get with some credit card accounts and online services show you “educational” scores. These scores let you see upward and downward movement, but they bear little resemblance to the scores creditors use to evaluate startup business loan applications.
4. Check Your Business Credit Reports and Scores
Once you’ve gleaned as much information as you can about your personal credit, start checking your business credit for mistakes and forgotten accounts that need correcting. You’re unlikely to find free business credit reports, but you can purchase reports and scores from the business credit bureaus.
5. Establish Business Credit If You Haven’t Already
In addition to having a D-U-N-S Number, issued for free by Dun & Bradstreet, you’ll need a business bank account and credit card. Establishing accounts with suppliers and vendors will further establish your business credit history.
6. Build or Improve Your Dun & Bradstreet PAYDEX Score
A D-U-N-S Number is a prerequisite for having a PAYDEX score, so if you’ve not applied for one yet, you’re overdue. PAYDEX is an excellent place to start increasing your credit score because the information comes from suppliers and vendors. If yours don’t already report to PAYDEX, you can add them as references, and Dun & Bradstreet will contact them to request your payment history.
7. Pay Bills on Time
Your payment history has the largest impact on your personal and business credit. Pay all your personal bills on time, and pay your business bills before they’re due— 30 days before for a perfect PAYDEX score.
8. Pay Down Credit Balances
Credit utilization has the second-largest impact on your personal credit score, so keep your balances below 30 percent of your available credit. Split up your monthly payments, if necessary, to keep your average daily balance well below 30 percent.
9. Improve Cash Flow
This might be a Catch-22 in that insufficient cash flow is what leads many small business owners to apply for financing to begin with. But freeing up cash can pay off with a better credit score. Improved cash flow will allow you to pay your bills on time or early, which can improve your scores and make you a more desirable borrower.
The Bottom Line
Once you’re working proactively to improve your business credit, you should see your scores inch up — or shoot up in the event you get paid-off collections removed from your credit report or you pay down high balances. But as anxious as you might be to reapply for a loan, this is one case where slow and steady wins the race — literally, since your time in business also impacts your score.
More From Seek
- 7 Fears to Overcome Before Starting Your Business
- On the Fence About Startup Funding? Here Are 5 Reasons to Commit
- 13 Lessons Entrepreneurs Wish They’d Learned Sooner
- How to Get a Loan With Bad Credit or No Credit
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