How To Improve Your Credit Score and Secure A Business Loan

Securing a business loan when you have a bad credit score is challenging, but not impossible.

The score you need to qualify for a business loan varies, depending on the lender, the type of loan, the amount, and other factors. For instance, traditional bank loans require a relatively high credit score, usually 700 or above. Banks put more emphasis on credit scores than other types of lenders. Their primary concern is whether or not the borrower is going to be able to pay the money back. If you have a good credit score, you have likely demonstrated a track record of paying off debts. This plays an important role in securing a business loan from a bank, particularly the larger ones.

Smaller banks, which are a common source of government-backed SBA loans, are often a little more flexible with regard to credit scores, in part because the government backing mitigates their risk in making the loan. A score of 650-700 should be enough to secure SBA loan approval.

Alternative (non-bank) lenders are less strict with their credit score requirements. For instance, merchant cash advance (MCA) companies are willing to provide funding to business owners with scores of 600 or sometimes lower, and they make decisions quickly. An MCA will take a percentage of the business’s credit card receipts daily until the loan amount is paid back with interest. It’s important to keep in mind, though, that the interest rates charged by such lenders is higher than a loan from a bank. The small business owner pays a premium for the funding because of their lower credit rating means they are a higher risk borrower.

If the cost of capital is your primary concern, and you are looking for a traditional type of lender (a bank), here are steps you can take to improve your credit score, increase you chances of securing a loan, and lower your borrowing costs in the process:

1. Get a copy of your credit report and examine it for errors. Make note of any information that is inaccurate or more than 3 – 5 years old. Credit agencies have policies for how long credit data remains on your account, and may remove outdated information upon the passage of time. Contact each credit agency (Experian, Equifax, and TransUnion) if you discover any negative credit items. Be prepared to submit proof of your payments and request that the information be removed or corrected.
2. Work with suppliers that have submitted delinquent payments on your account. Try to negotiate alternative payment arrangements and, by all means, stick to those commitments. After several months of on-time payments, ask them to report it to the credit agencies. Making good on negative accounts will show that you are serious about improving your business creditworthiness.
3. Lower your credit utilization. Make an effort to reduce your use of credit and lower your amounts owed. Paying off debt is critical to improving your credit profile. Try to pay down debts on various credit cards in order to consolidate how many have outstanding balances. While incurring debt is often part of the process of running a business, accumulating too much debt can can raise warning flags and might be considered a sign that your company is in financial distress.
4. Establish your business as a separate entity from your personal finances. Work with a CPA or attorney to create a separate corporate entity, such as a Limited Liability Corporation (LLC). The main advantage is to shield personal assets, such as your home or personal savings, from your business debts and any legal liabilities. Establishing a legal entity also makes your company look more professional, which helps when trying to secure financing.
5. Be sure to have a business bank account. A business account documents for prospective lenders your record of deposits, withdrawals, and balances.
6. Open a business credit card and make monthly payments on time and in full. Business owners typically get several credit card offers a month in the mail. While someone with no credit history or a poor track record of payments is unlikely to get a large credit limit, the goal is to open an account, charge necessary expenses and pay them off every month. This will help build a solid credit history and increase your credit score. Eventually, the credit card company may raise your credit limit after several months of payment.

Running a business is a marathon, not a sprint. While you may not be able to overcome bad credit and get working capital or a loan for expansion today, over time one can establish a history of reliable repayments. By doing so, you can raise your credit score and, in turn, increase the odds of securing a small business loan or other type of funding at a reasonable cost of capital.