Nothing feels worse than applying for a business loan only to be rejected for a poor credit score. Commercials abound on television offering ways to help you repair your personal credit history. While some of these sales pitches are exaggerations, you should take your credit score seriously. This important number can mean the difference between getting the critical funds you need for your business.
While most of us know the basics of building a personal credit history, not many understand how to do it for your business. Building a credit score for a new business is similar to building a new personal credit history. Banks, businesses, loan officers and investors look at the business’ credit history to evaluate your risk. The credit scores look at:
- Payment history: Do you pay your debts on time or are you behind? If you’re behind how far behind are you? If you were behind in the past when was it?
- Accounts sent to credit agencies
- How debts are spent: Do you use your debt all at once? What do you spend it on?
- Your debt ratio: How much debt do you have relative to your income?
The information is compiled by the credit agencies to give you a score that describes your risk (the higher the score, the lower the risk). Lenders use this risk score to determine how likely you are to repay a loan. This sets the interest rate they charge you along with the amount you can borrow. If you have little or poor credit history, you may be turned down for loans or charged high-interest rates. Building a good business credit history isn’t hard, but it does require some work.
This Could Be Me
Sergio’s story is all too common. After successfully starting a small financial advisory firm he decides it’s time to upgrade his office space. He goes to the bank to apply for a business loan. After looking over his credit history, the bank declines his loan. Puzzled, Sergio checks out his credit history. It turns out that he had been behind one month on his utility bill for the past year, much to his surprise.
The situation troubled Sergio. How could something so small hurt his business? Sergio turned to a credit counselor for advice. Since the only part of his credit history that hurt him was the late payments, the counselor advised him to monitor his payments. Taking the advice to heart, Sergio got all his accounts up to date and set an automatic payment schedule for his utilities. After a year of never missing any payments, the bank approved his loan.
Never Underestimate Your Credit
Even small things like being one month behind in your payments can quickly lower your credit score. That’s why it’s extremely important to stay on top of your business credit. Having good credit history starts the moment you open your business. Every business transaction you make counts towards your credit score. Having a good credit history can mean lower loan interest rates and larger borrowing limits.
Building a solid credit history doesn’t have to be a hassle. It’s much easier than you might believe. If you’ve never looked at your business credit history, or are starting a business, you can check out this post that explains How to Build Business Credit. You can read through how to register your business, review your current credit history, and size up where you’re at.