Building Your Business Credit Score
One of the main reasons small business owners have a tough time applying for business loans is having a poor credit score. Most people are aware of their personal credit score as that can affect their ability to lease a house or car. What most small business owners don’t realize is that their business also has a credit score, and a low business credit score makes it almost impossible to apply for a business loan or lease new real estate to expand your business. If your business has a low credit score, don’t worry! There are a number of ways to build your business’s credit score and get it back into shape. But first, let’s take a look at some of the benefits having a good business credit score will get you:
Benefits of a Good Business Credit Score
Higher Chance of Being Approved for Leases and Loans: As mentioned above, having a bad credit score significantly reduces your chances of getting approved for a loan or lease. On the flip side, having a very good credit score gives you a great chance of getting approved when you are looking to expand.
More Favorable Loan Terms: Not only does having a good credit score increase your chance of an approval, but it also could grant you more favorable terms on the loan. Lower interest rates, less likely to require collateral, and more flexible payment terms are just some of the things a good credit score could convince lenders to provide.
Bad Credit Explained
Now let’s take a look at a hypothetical scenario to see how bad credit can happen, and what will happen as a result. Consider Gabriela Márquez, who finally fulfilled her dream of buying and running a local bar. She has not gotten around to incorporating her business but she plans to. She currently does not use a business bank account, as she is confident that she can keep track of the money in her personal bank account. She uses a business credit card for inventory purchases but has been late on her last few payments. She is also currently trying to balance a lowering income while having enough money to pay the rent on her property. Gabriela wants to expand her business by opening a second location, so she decides to apply for a small business loan and inquires about leasing a nearby property. She is quickly denied by the bank where she applied for the business loan and her lease application is also promptly denied. Now Gabriela feels stuck and doesn’t know why she is in this situation.
There are a couple of problems with Gabriela’s actions that led to her current predicament. First, she has not incorporated her business. This not only makes it harder to build credit, but it also runs the risk of companies tying one’s personal credit to their business credit. Incorporating her business and registering it with her department of state will lessen the chance of her personal credit affecting her business. Using her personal bank account is problematic in a number of ways, but it also hurts her credit not having a bank account in her business’s name. Gabriela’s lower-income combined with her high debts will also lower her credit score. However, her biggest issue is that she has a business credit card that she has made late payments on. Making late payments on a business credit card can make your business credit score lower rapidly. Gabriela could avoid this situation by ensuring all of her business credit card payments are made on time. After making the adjustments outlined above, Gabriela’s credit eventually rises enough to get her an approved business loan.
If, like Gabriela, you are struggling with bad business credit or want to learn more about how to build your business credit score is calculated (and how you can build one up after it falls) check out this article on how to build business credit quickly.