It's a fact--financing is essential for starting and running a small business. Unless you're independently wealthy or your company's vision doesn't extend beyond a limited, home-run operation, most businesses will at some point require capital. And when you seek small business financing, one of the first inquiries any lender will make involves your credit score.
Maintaining a solid credit rating, both for yourself personally and for your business, is essential for obtaining financing. But a lot of business owners assume their credit rating is completely out of their hands. These owners would be surprised to hear just how much they can do to improve their credit, and as a result their likelihood of being approved for funding by banks and other small business lenders.
If you're struggling to find business financing due to a less than stellar credit score, here are a few tips to help you get back on track:
1. Regularly monitor both your personal and business credit reports
Most people know the importance of monitoring their personal credit report for erroneous information. But if you're a small business owner with an established Employer Identification Number (EIN), did you know that your business also has a credit score? It's essential that you continuously monitor both of these credit reports for false claims, which can have dramatic impact on your ability to secure financing.
If you're having trouble getting approved for a small business loan and aren't sure why, take the time to dig into all of your available credit reports--business and personal--to check for false information. Experian and Equifax are well known reporting agencies that will track both your personal and business credit. Dunn & Bradstreet is another agency that specifically generates business credit reports.
2. Always pay on time
The most important thing you can do to keep both credit scores in good standing is to always, always make payments on time--both in your personal finances and for your business. Payment history is the single largest determining factor of your overall credit rating, making up 35% of your score. This is particularly important for new businesses since the shorter your credit history, the greater the impact of even one single late payment can be. There's just no getting around this one--you have to pay your bills on time, every time.
3. Avoid using your personal credit for business
Because the information given to credit bureaus to establish business credit is sent voluntarily, establishing credit for your small business can be tricky. Lenders and other businesses aren't required to report your payment history or any other information, so establishing good business credit can take a long time. Making sure that all your accounts are categorized correctly as for personal or business use is one way to help establish your company's credit.
As you seek to establish your business credit rating, make sure that you're using your Employee Identification Number (EIN) and not your social security number to open your business accounts. Although the lender or credit card company might check your personal credit history in order to open a new account, business accounts should always be established under the business' name and tax identification. Otherwise your activity on these accounts--on time payments and appropriate utilization, for example, won't help to improve your business credit rating.
4. Reduce credit utilization
After payment history, the next largest determining factor of your FICO credit rating is "amounts owed" or credit utilization--with a 30% impact on your overall score. This number is impacted by the percentage of available credit your business has outstanding at any given time. Ideally, you should try to keep that number as low as possible, close to 30%. For example, if the combined credit limits for your business accounts is $100,000, you should aim to carry a maximum total balance of $30,000 at any given time. One way to keep your outstanding balances low is to make multiple payments per month, instead of waiting until you've reached the end of the month or are close to your credit limit before paying off an account.
5. Increase your credit limit
If you're unable to reduce your company's need for credit, getting your credit limit increased is another way to minimize the appearance of overall utilization. In this case, instead of reducing the slice of your metaphorical credit limit pie being used, you're simply making the pie bigger. You can increase your credit limit either by opening additional lines of credit or requesting a higher credit limit on your current accounts.
But if you do decide to try this path, it's important to exercise caution. Credit card companies will usually perform a "hard credit inquiry" as part of the process, and each hard credit inquiry can negatively impact your overall credit score. Also avoid opening multiple new credit accounts at once, which can give the appearance of desperation from a sinking business.
Unfortunately, there's no single quick fix to improve your personal or business credit rating. Your credit score is ultimately measuring your likelihood of making on-time payments and fulfilling the obligations of a loan. So although you do have some control over establishing good credit and ensuring the accuracy of your various reports, your most important job is simply to be a good borrower.