Gone are the days when taking out a loan means you’re simply too broke to fund your needs. Today, getting a loan can be one of the best ways to achieve your long-term financial goals. It can be used to fund your startup business, buy a real estate property, and improve your cash flow. However, not everyone is eligible for financing.
You need to prove yourself to be creditworthy.
Strong credit history is the key to obtaining a better loan. When we talk about a good loan, we’re referring to the financing options that will give you more perks than headaches, in the forms of lower interest rates, better payment schedules and terms, bigger loan amounts, and easier and faster application process with higher chances of approval.
Business credit rating is no different. Unfortunately, the quick fixes for boosting a poor credit rating can only do so little, so you should start building your business credit score today to improve your eligibility for a better business loan in the future.
If you’re planning to take out a loan that will benefit your business big time, here are a few steps you can take to build your business credit.
1. Clean up your personal credit history
Business credit and personal credit go hand in hand. If your business has no credit history, lenders will look at your personal credit score as a numerical representation of your creditworthiness.
You can improve your personal credit score over time with good habits like paying your bills on time, clearing up your outstanding debts and refraining from opening too many accounts.
2. Establish a business credit file if you have none
A business credit score is different from a personal one in the sense that it has got more of the commercial attributes Your business credit is calculated using the information listed on your company credit file. These include the following:
- Overall credit history – these refer to your business credit shopping patterns and the type of credit applied for.
- Age of business – the older the business, the more likely it is to be approved.
- Commercial credit information – these refer to defaults, late payments, court writs, and judgments
- Company details – company structure, company size, business address, directors, shareholders, etc.
3. Take out a small business loan today
Ever wondered why small, young businesses find it difficult to qualify for larger loans from banks? It’s because both the business and the owner don’t have a strong credit history. If you’re planning to apply for better, larger-scale loans in the next few years, consider taking out small, short-term business loans today, which can help improve your credit score.
Check out the business loans you’re currently eligible for. Borrow small amounts and build a good credit history by making regular, on-time payments. After successfully paying off your first “bad credit” business loan, your improved credit score will help you qualify for business loans with higher amounts or better terms in the future.
Another advantage of taking out a loan is you’ll build a solid relationship with a specific lender, which can prove your creditworthiness in the future when you’re ready to go back to apply for a bigger loan.
4. Incorporate your business
One of the best ways to improve your eligibility for a business loan is to incorporate your business. Get a federal tax ID number. Open a business bank account. Secure a credit card or lines of credit and maintain good standing.
Again, the goal is to establish accounts with suppliers and vendors and make valuable connections. Consider collecting reference letters from current creditors and vendors to prove your creditworthiness.
5. Check your credit reports annually
You should also make it a habit to check your personal and business credit reports annually. You might need to clear up errors and previous collections you might’ve forgotten about. Doing so will help you determine the areas you should work on and assess the best financing options to explore based on your eligibility.
A low score is a primary reason why traditional lenders reject applications for small business loan financing. While there are alternative lenders who accommodate bad credit borrowers, they usually lend smaller amounts and charge notoriously high APRs and additional fees.
Author Bio: Carmina Natividad is a passionate resident writer for Lending Connect, a business lending platform in Australia which connects clients to a specialist business loan provider that suits their business needs. She enjoys sharing her insights about business and finance.