As an entrepreneur, it is assumed that you are aware that your business credit matters. It makes a difference in applying for loans, it affects your credit score, and improves your ability to apply for credit with your vendors.
But How Aware Are You?
Lenders of all kinds, especially banks, will look at how your personal credit score benefits or harms your business credit. That can have an impact on their willingness to loan you money or finance your endeavors.
Lenders look at whether you are consistent with repayment and that you are not in default with payments, then will adjust rates and terms accordingly for your particular loan. One of the main reasons for looking at a small business owner’s credit record is that it is a good indicator of repayment of business loans under $100,000.
The legal structure of your business may be a strong determining factor in whether or not lenders will search your personal credit rating. For example, sole proprietorships directly link the owner to the business and many small business owners will open a start-up loan for operations and inventory purposes. Hence, limited liability companies were formed – that status works to protect the business owner from any liabilities that the business may incur.
As with personal credit, business credit takes time to build or rebuild. Many entrepreneurs have not been in business long enough to have a strong professional credit presence. Therefore, lenders will loan money to a business based on the owner’s credit rating because it is traditionally more extensive and varied.
What Do Lenders Look For?
A variety of factors and metrics are considered when a small business owner applies for a loan, financing, or funding. The factors may include, but are not limited to your overall financial statements, current debt-to-credit ratio, and the size of your loan request. Cash flow, daily balances, transaction details, profit and loss statements, and tax records may also be taken into account.
“So, what can a business owner do if bad credit is preventing them from getting a business loan?” asks Carolyn Brown at Black Enterprise.
“The good news according the SBA is that there are alternative funding programs and solutions providing business owners the opportunity to obtain a business loan or line of credit regardless of having bad personal credit. Instead, other factors are taken into consideration such as bank deposit history, credit card sales, credit partners, and other data sources.
Bank Deposits — A business with regular bank deposits can put its cash flow to work with revenue-based loans. This program is based on the deposits going into the business bank account on a monthly basis. Typically, a business can obtain a business loan equal to 10% of its annual gross deposits regardless of having bad credit. Another benefit of this program is the time it takes to get funded, which is approximately seven business days. Keep in mind the loan term can be as long as 18 months with this program, with rates slightly higher than a traditional bank rate. It requires no collateral, financials or tax returns. Repayments are made in small increments every day via ACH from the business bank account.
Credit Card Sales — This type of funding program, known as a merchant cash advance, provides businesses with upfront cash in exchange for a portion of future credit card sales. For businesses that have regular monthly credit card sales but struggle with bad personal credit, a merchant cash advance may be a viable option.
However, be very selective on what merchant cash advance provider you select. Some providers can cost as high as 38% while others can be as low as 12%. In addition, when it comes to repayment, the majority of merchant cash providers take a fixed percentage of your daily credit card receipt volume until the advance you took is paid back. Other business cash advance providers may offer a fixed monthly installment payment for its repayment method.
Credit Partner — Using a business partner(s) as a credit partner for obtaining lines of credit in the form of business credit cards can be a viable solution to overcome a personal credit challenge. A business partner who has strong credit scores is the best place to look.
You may also want to consider someone who may be interested in participating in your business as a potential credit partner. This method does bring risk to the credit partner because they are cosigning with the business to obtain funding. However, these types of unsecured business credit cards will not appear on the personal credit reports of the cosigner unless they go into default.”
Source: Black Enterprise
Benefits of Building Business Credit
There are a number of benefits to building or rebuilding your business’s credit rating. A strong credit score will set you up to get the most capital, the best rates, and terms to help you grow or expand your business.
When cash flow struggles emerge, a clean credit history can help you get the money to keep your business afloat. It is also useful when applying for a credit line from a trade vendor which can help your business maintain a healthy cash flow or inventory to supply the demand from your customers.
Ultimately, the goal is for your business credit score to stand apart from your personal credit rating. It is not as difficult as it might first appear but will take time and intention.
You can improve your business credit score by:
- Keeping your business as financially healthy as possible
- Be punctual with your payments
- Don’t use your credit unless necessary
- Check your business credit report often to make sure it stays clean and your identity has not been compromised
Although you want your business credit score to stand out from your personal one, the two do bleed together because of a shared risk. Your personal credit issues often bleed into your business life. This is part of the risk that lenders are taking, and it is something you must be aware of when applying for credit as a business.