Not only can a bad credit score have an impact on your personal finances, but it can also have an effect on your ability to obtaining funding for your small business. Although not all lenders evaluate credit scores in quite the same manner, it is still important for small business owners to have a solid understanding of their credit scores and how a lender is likely to view them. Along with your business credit rating, lenders will also likely consider a variety of other metrics in determining whether to extend credit to you. Such metrics might include the number of years you have been in business, your annual revenues, and whether you have collateral. Of these metrics, credit score is usually the primary factor that lenders use in determining whether to approve your loan and the amount of credit that will be extended to you. An imperfect credit score might not completely prevent you from obtaining a small business loan, but it can limit your options as well as increase the cost of financing.
Understanding Your Credit Score
Credit scores are assigned a numeric value based on a variety of factors, including the amount of your available credit that you use as well as whether you make timely payments toward your debt obligations. An excellent rating is considered 800 or above. This type of credit score reveals that you have no late payments and no collections appear on your credit report. A credit score of between 750 and 800 is still considered very good. The primary difference between a very good credit rating and an excellent credit rating is that a user with a very good credit rating typically has a shorter credit history. A good rating will fall between 700 and 750 and will still allow you to get a fairly good rate with your lender. Once your credit rating dips to below 700, it is considered fair and may reflect some recent late payments, but nothing current. Credit scores between 600 and 650 are considered a bad rating and reveal current collections. This means that you could be at risk for being turned down for a loan and will likely be required to pay a higher interest rate if you are approved. Anything below 600 is considered a bad rating.
Improving your Credit Score
Even if your credit score is not as good as you would like, this does not mean that you must give up on your quest to obtain financing for your small business with low credit. It does mean that you need to focus on improving your credit score. The first and most important step you need to take is to monitor your credit report. Surprisingly, many people simply are not aware of what is on their credit reports and may not even be aware of whether all of the information is correct. Review your credit report promptly to ensure there are no mistakes that could be harming your credit score.
Additionally, it is a good idea to obtain a major credit card and take steps to keep the balance low and make payments timely to begin building your credit score. If possible, you should also try to pay off as much debt as possible. Also, avoid applying for credit that you do not actually need.
Small business loans are often an inherent ingredient in starting and expanding a small business. Ensuring that your personal credit score is as healthy as possible is one of the most important steps you can take to boost your chances of receiving the lending that you need.