While business loans are technically made to businesses, most lenders will review your personal credit history when you apply for a business loan. A personal credit score provides a more accurate picture of your ability to pay back your debts, especially if your business has not yet established a business credit score.
Given this, if your personal credit history has some weak points, you’ll want to take time to improve it before applying for a business loan.
What lenders look for in a personal credit score
Lenders want to know that borrowers manage their finances well and have the income needed to repay loans. When they review your personal credit history, they’re evaluating your credit use, capacity to pay back existing and new loans, the collateral you may have available to secure loans and whether you’ve made good on loans and other obligations.
They’ll also look at how much credit you currently have (the limits, as well as how much you’re using) and whether payments are made on time. Together, this information feeds into a credit score.
Know your history before lenders do
If you spot incorrect information, such as charges that don’t belong to you or even accounts that were fraudulently opened with your information, act immediately, as this can take time to clear up. Don’t contact the credit-reporting agencies. Instead, go directly to the holder of the account that you’re disputing, like the credit card company or bank.
Take steps to improve your credit history
In our experience working with small businesses, we’ve seen a wide range of credit score issues and have helped business owners work to address them. Here are a few of the most common issues we’ve seen and steps you can take today for improvement:
Issue: Your credit report doesn’t reveal major problems but your score is low. There are a few things that may cause this. Perhaps you’ve been cautious in your use of credit and haven’t established enough of a history, or maybe you’re using more than 50% of your credit limit.
Solution: There are a couple of easy ways to improve your score. The first is to pay down your balance, so that you’re using about 20 to 25% or less of your total credit line. The second is to call the credit card companies and ask for a credit-line increase. This is particularly helpful if you don’t carry high balances, but they look high compared to the total credit limit allowed.
For example, if you only carry a balance of $500 and have $1,000 in total credit, then you’re using 50% of your available credit. But if you have that same $500 balance on a total credit-line limit of $2,000, it changes usage from 50% to just 25%, which is regarded as much better.
A word of caution, though: Don’t be tempted to open multiple credit cards, especially store cards, which usually carry high interest rates. Aim to maintain three to four credit cards, pay them on time and keep the balances in a healthy range, typically less than 30% to 35% to total credit limit.
Issue: Your credit report shows late payments. On-time payments demonstrate that you take obligations seriously, but even the most responsible people can slip up.
Solution: Consider setting up auto-payments. Each month, the amount owed is withdrawn and you don’t have to worry about making payments on time.
For credit cards, arrange to have the minimum due each month automatically withdrawn. This will help ensure that you always meet your minimum obligation on time. If there’s a remaining balance, you can make an additional payment later.
Issue: Your credit report includes delinquent accounts that have gone to collection, such as unpaid credit card, medical or utility bills that your original creditor has sold to a third party credit collector.
Solution: Negotiate payment plans with creditors to establish manageable payments. This can also be done with collection companies and even for government tax liens. Showing proof of payment plan to a lender demonstrates that you’re taking proactive steps to correct previous mistakes.
Issue: Your credit report has bankruptcies or other negative public records: Bankruptcies, collection accounts and other major issues may indicate poor personal financial management – but they may also be the result of job loss, illness or other personal or professional setbacks.
Solution: Be honest with potential lenders about it. These records take a long time to clear up, so the best thing to do is to talk to your lender about your history and circumstances. Some may be willing to make exceptions based on your special situation, especially if your recent record shows you are managing credit more responsibly.
Don’t give up: Talk to Excelsior Growth Fund about options
While it’s great to show lenders that you manage debt well, if your history demonstrates otherwise, don’t give up. Excelsior Growth Fund considers both your history and your future potential. We also offer financial and business education, as well as a range of loan options. We can help you get a sound start and stay on the path to financial health and business success. Contact us today.