Do you have a small business or a side hustle you want to expand in the future? If you’ll be looking to get a small business loan, you may need to give your finances a checkup and make sure they are ready.
Depending on the status of your business, you may or may not have a business credit score. If you don’t have any lines of credit or a business credit card, your lender will most likely defer to your personal credit score to find out if you are creditworthy or not. Check out this resource to learn more about both your personal and business credit score.
In an ideal situation, creditors want your credit score to be between 700-800; however, you may be able to qualify if your score is at least 625. While there is no hardline minimum for your credit score, the higher it is, the more likely you are to get a lower interest rate, which can save you money over time. Let’s review how to potentially improve your credit score.
What Makes Up Your Credit Score
Your FICO score, or just credit score, is based on five main factors: your payment history (35%), the amounts owed on credit cards and other debt (30%), how long you’ve had credit (15%), types of credit in use (10%) and recent credit inquiries (10%). Small business lenders are likely to check FICO because they require a personal credit score for loan applications. Many lenders need to see how you manage debt personally before making a decision.
If you have a sub-par credit score (lower than 650) and don’t know why, pull your credit report and review it with those five factors in mind. If you have late payments or high balances on your credit cards, creating a high credit utilization ratio, this may have hit your score hard. It’s important to make your payments on time each month, and it’s important to keep your balance low. Lenders favor applicants who use less than 30 percent of available credit.
The other variables considered have less of an effect individually, but they are still important to consider as a whole. Lenders like to see a long credit history filled with on-time payments. This helps a lender decide whether you will be a reliable borrower. Lenders do not want to loan money that they will not get back.
How to Improve Your Score
1. Pull your credit report and look for what has brought your score down. Everyone can pull a free credit report from each bureau annually.
2. If late payments are the culprit, consider writing a goodwill letter and asking your creditor to consider removing your late payment mark from your credit report. Otherwise, continue to make on-time payments each month.
3. If credit history or credit inquiries are an issue, only time will help these factors. Lenders do not like to see a lot of applications for credit in a short amount of time because it appears risky.
4. If the amount you owe on credit cards and other debts is above 30 percent of your available credit, this may be affecting your score. It’s a red flag to lenders that you may be taking on more debt than you can handle. The way to help your score is to create a plan to reduce your debt and utilization ratio. Borrowers who have high utilization rates present a greater risk to lenders because they may be unable to repay their debts.
A Budget Is Key
It’s important to have a budget that is manageable for your personal financial situation and your business. If you don’t have a budget, it’s time to create one and get in charge of every penny you earn and spend. Check out this budgeting worksheet and these useful budget calculators so you can create a plan where your small business can prosper.
Lenders are looking for borrowers who have a budget, are able to repay their debts, and have a clear plan for their business. If you have issues with your credit and are struggling to repay your debts, and you decide that you would prefer to seek out advice, consider nonprofit credit counseling to get back on track.