Could a poor personal credit score or lack of business credit prevent you from obtaining a business loan? Yes. Take steps now to establish a stellar business credit profile.
You can improve your odds of getting a “YES” on your loan application, by building up your business credit now -- well before you need it.
Some small business owners have experienced difficulty getting loans in the post-recession lending environment, but the tide is turning. According to a recent article in Inc. magazine, 20.1 percent of small business loans were approved in July – a post-recession high water mark.
If you’re preparing to apply for a loan, keep in mind that your personal credit history may be used as a reference if you don’t have an established business credit history. Particularly for businesses with less than 20 employees, personal and business credit is closely linked. So if your personal credit score has taken a hit over the past few years, you could have a difficult time getting approval for a business loan. Establishing good credit for your business can help pave the way to the loan you may need later.
How to get started establishing business credit
According to the Small Business Administration (SBA), you can improve your odds of getting a “Yes” on your loan application, by building up business credit well before you need it.
Separate your personal credit from business credit
Sole proprietorships and General Partnerships are common small business structures, but they sometimes mingle personal and business finances, which could lead to trouble if there is an issue. It can affect credit on either side of the fence. Lenders want reassurances that your business can stand on its own. A Limited Liability Corporation (LLC) or other corporate structure allows you to separate your business dealings from your personal finances and can help to establish credit as a business entity.
Register with credit reporting agencies
Business credit is reported voluntarily, so even if you have well-established credit accounts with suppliers, you may not be on the radar of business credit reporting agencies. You can register with a credit reporting agency, such as Dun & Bradstreet, Experian, Equifax or others, to be listed on their database, which then makes your business searchable for credit inquiries.
Apply for credit in the name of the business
Make sure the creditors with whom you establish accounts report payment histories to at least one of the business credit reporting agencies. The record of your payment history helps establish a credit score for your business.
Prepare a business plan
It’s a smart idea to have a business plan no matter what, but if you’re ultimately planning to apply for a small business loan, it’s essential. A business plan and financial documents, such as the business’s balance sheet, profit and loss and cash flow statements are mandatory for the vast majority of SBA loans or other lending institutions.
Manage your business debt
When you open a credit account for your business, follow these basic guidelines to help establish and improve your credit rating:
- Consistently pay on time. Debt payment history is a key piece of reporting data and essential to maintaining an acceptable credit score.
- Keep your debt ratio (the amount you owe versus the amount of available credit) to no more than 30 percent of the credit limit, which demonstrates your ability to have credit without abusing it.
- Once you’ve established a solid payment history, request a credit limit increase (even if you don’t need it) to lower your debt to credit ratio.
- Use your credit account from time to time to keep your credit active and maintain a credit score. Zero activity on your credit accounts may actually lower your credit score. Again, your objective is to demonstrate your ability to have credit without abusing it.
- Separate your business and personal credit. Co-mingling personal and business credit can increase the number of inquiries from credit reporting agencies.
By proactively establishing business credit now, you’ll be positioning your business for success when you are ready to apply for a loan.
Kelly Burkart is a freelance writer from Minneapolis, Minn. While she has spent most of her time writing about financial services the past 15 years, she has also explored and written about everything from cardiovascular health to travel, higher education and sustainable energy practices.