The Impact of Personal Credit on Small Business Loans and How to Improve Your Score
As a small business owner, your personal credit score can significantly impact your chances of obtaining a small business loan.
Lenders often assess an individual's creditworthiness to gauge the level of risk associated with lending funds. As a result, understanding the correlation between personal credit and business financing is crucial for securing the capital you need to grow and expand your company.
In this article, we will explore the importance of personal credit in the loan application process and provide a few tips to boost your credit score.
Please note: This is not a comprehensive guide to building your credit. Please consult a financial professional before signing any loan.
Before approving a small business loan, financial institutions typically consider the creditworthiness of both the individual borrower and the business itself. Since most small businesses are closely tied to their owners, lenders often evaluate the personal credit scores of entrepreneurs as a measure of reliability and financial responsibility.
A good personal credit score indicates that you have a history of responsible financial behavior, making you a more attractive candidate for a loan. On the other hand, a poor credit score may lead to loan denials or higher interest rates due to a lender’s perceived higher risk.
Check out this other article we published — The 5 Cs of Financing — to learn more about how lenders evaluate small business loan applicants.
As a frame of reference, here’s a quick overview of credit score ranges from the credit bureau Experian:
800 to 850: Excellent
740 to 799: Very good
670 to 739: Good
580 to 669: Fair
300 to 579: Poor
With that in mind, here are a few tips to improve your personal credit score:
1. Pay Your Bills on Time
Consistently paying your bills on or before the due date — including credit card balances, loans, and utility bills — reflects positively on your credit score. Conversely, failing to pay your bills on time will damage your credit. Set up reminders or automatic payments to avoid any missed payments.
2. Monitor Your Credit Report Regularly
Obtain copies of your credit report from major credit bureaus — such as Experian, TransUnion, and Equifax — and review them for any errors or discrepancies. Promptly dispute inaccuracies to ensure your credit history is accurately represented.
3. Reduce Your Credit Utilization
Keep your credit card balances low relative to your credit limits. High credit utilization ratios can negatively impact your credit score. Aim to use no more than 30 percent of your available credit or your score may go down.
4. Diversify Your Credit Types
A well-rounded credit history with various types of credit — such as credit cards, installment loans, and retail accounts — can strengthen your credit score. However, avoid opening multiple new accounts simultaneously, as it can lower your score.
5. Avoid Closing Old Accounts
Length of credit history matters. Closing old accounts shortens your credit history, and will potentially lower your credit score. Even if you don't use an old credit card, consider keeping it open with a zero balance.
Conclusion
By proactively managing and improving your credit score, you can enhance your chances of securing the financing you need to grow your small business. Taking the steps above can help pave the way for a successful small business loan application and foster the growth of your company.
If you have more questions or are interested in applying for a small business loan, please contact us at info@altcap.org or call (833) 549-2890.
