Credit agencies calculate business credit scores in order to assess a company’s creditworthiness. The main question that a small business lender wants to know is whether or not the borrower will be able to repay the money that has been lent.
Credit scores take into account outstanding balances on credit cards, payment history (including amounts paid and the timeliness of those payments), credit utilizations and other factors. Naturally, the better your credit score, the higher the likelihood a company seeking capital will be able to secure it. Thus, the score can impact the yeah-or-may decision and the amount, as well as the interest rate and terms.
There are three major credit reporting agencies: Equifax, Experian and TransUnion. They collect financial data from vendors who have extended credit to you, as well as from public records, which inform potential lenders about existing tax liens or bankruptcy information. The agencies then provide your credit information to companies that are considering extending credit or lenders that are in the process of assessing a funding request.
A low credit score means that you will have fewer credit options and that those options will be less attractive. The lower the score, the higher the risk for the lender. Borrowers pay for that riskiness in the form of higher interest rates. Often the funding will come via a business line of credit or from an alternative (non-bank) lender, rather than a traditional small business bank loan. The good news is that business loans for companies with bad credit are available.
Having a substandard business credit score does not mean you are doomed forever. It just means that there is work to be done before a lender will consider a small business loan application. Credit scores can be fixed. Here are some ways to do it.
1. Check your credit report for errors
Get a copy of business credit report and learn your score. After all, you cannot fix something unless you know it is broken. Find you what is causing the score to be rated poorly and immediately work to address those items. For instance, if you settled a debt months ago but it still shows up on the report, contact the credit agency and the company that has reported the problem.
To make sure that a mistake is corrected as quickly as possible, immediately inform both the credit bureau and organization that provided the information and let them know that you are disputing something on the report. You will need the help of both entities to adjust any information that is incorrect.
2. Pay bills on time and in full, if possible
There is no better way to improve your credit score than to put your money where your mouth is. Paying on time over the course of several months (or even years) is the best way to demonstrate your creditworthiness. Paying the full amount is advisable, but even if you cannot do so, making a timely payment serves you much better than paying a partial amount that arrives late.
3. Lower your credit utilization ratio
Credit utilization is a figure that represents the percentage of available credit extended to your company that is currently in use. For instance, if you have opened corporate credit cards and have “maxed them out” in order to get your business up and running, your credit utilization will be high. If the ratio of credit used exceeds that mount remaining credit available, your utilization is too high. A target percentage to shoot for is 15 percent or less.
So how do you lower your credit utilization?
Pay off existing balances as quickly as possible. (There is a theme here.) However, the best way to ensure that you can get credit from new sources is to show that you have the ability to pay off the people who have already extended money to your firm. If you cannot eradicate debts immediately, start making headway. Pay off the smaller ones to zero balances and then continue to make consistent payments to larger creditors.
At the same time, if you have to make purchases for your company, try to do so using cash if the amounts are small enough that they do not hurt your overall cash flow. A surefire way not to avoid increasing your credit card balances is to not charge any more items.
If you have bad credit and can wait for funding, by all means make dents in the amount of money owed. Borrowers who exhibit a pattern of timely payments eventually will become able to secure small business loans at attractive rates and terms, either through traditional small business bank loans or via SBA loans.
Companies typically do not develop a bad credit rating overnight, so be realistic in your expectation on how quickly blemishes can be resolved. If your company is performing well right not and needs a boost to get over the hump, it might mean taking higher cost money now and then refinancing later to a more attractive small business financing product. Fortunately, there are many options available. The challenges is finding the right one for your company’s situation.