Last Updated on August 9, 2023 by Guest
As a startup founder, you know well that one of the most important things you’ll need to do to launch and grow your business is to fund it. But as you learn how to qualify for small business loans, you’ll quickly learn that it isn’t the easiest thing to do, especially if you don’t have a solid credit score.
Banks and lenders use your credit score to determine your creditworthiness and the likelihood that you’ll repay the loan. If this sounds a little intimidating, worry not! In this blog post, we’ll discuss how you can build your credit score to successfully secure a business or startup loan.
Credit scores are three-digit numbers ranging from 300 to 850, representing your creditworthiness. Higher credit scores indicate that you have a good credit history. Before you begin building your credit score, it’s important to understand what factors affect it.
Here are the five factors that typically determine your credit score:
- Payment History: This is your history of paying loans and bills on time.
- Credit Utilization: This is how much credit you have used compared to your credit limit.
- Length of Credit History: This is the length of time you have had your credit accounts.
- Types of Credit: This is the variety of credit accounts you have, such as loans, mortgages, and credit cards.
- New Credit: This represents the total number of recent credit accounts you have opened.
Check your credit report to ensure accuracy before you start improving your credit score. Your credit score includes details about your credit history, including payment history, credit utilization, and length of credit history.
You can obtain a free credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. Always review your credit report to look for mistakes or fraud. Should you find any errors, dispute them with the credit bureau.
One of the easiest ways to build credit is to use a credit card responsibly. Start by applying for a credit card that’s designed for people with limited credit histories or a secured credit card that requires a deposit.
Use whatever credit card you get to make small purchases and pay off the balance in full each month. This will demonstrate to lenders that you can manage your credit responsibly and make on-time payments.
One of the most crucial elements determining your credit score is timely bill payment. Late payments can negatively impact your credit score, which can remain on your credit report for up to seven years.
It would be best to set up automatic payments or reminders to make sure you pay your bills on time.
The amount of credit you use compared to your credit limit is called your credit utilization. Typically, a credit usage of 30% or less is what lenders prefer. For example, if your credit limit is $1,000, you should aim to keep your balance below $300.
High credit utilization can indicate that you’re relying too heavily on credit and may be at risk of default.
You can lower your credit utilization by increasing your credit limits. Request a credit limit increase by contacting your credit card company. You might need to give further details about your income or credit to qualify.
Just remember to be careful when requesting a credit limit increase, as it may lead to higher spending and debt if you’re not too careful.
Your credit score can improve if you have a variety of credit accounts. So consider taking out a small personal loan or an installment loan. Make sure to make on-time payments and pay off the loan as quickly as possible.
Never ever mix your personal and business finances! Doing so can make it difficult to track expenses and income and hurt your credit score if your business falls into financial trouble.
Building your credit score takes time and effort, but it’s a crucial step in securing a business or startup loan. By following the strategies we’ve outlined above, you can improve your credit score and increase your chances of qualifying for a small business loan.
Remember, lenders want to ensure you have a track record of responsibly managing credit. Taking these steps can help you demonstrate that you’re a reliable borrower and increase your chances of securing a loan.
If you still struggle to qualify for a loan, consider working with a credit counseling agency or financial advisor. They can provide you with the proper guidance on improving your credit score and building a strong foundation for your business.
For more insightful articles on how you can take your startup to the next level, check out New Startups today!