This is Part II of a four-part series on how to get loans to start or expand a small business despite bad credit. Fortunately, there are more sources for loans today than in the past. This Forbes magazine article details how nontraditional lenders “have figured out how to streamline the loan process by taking a different approach to the underwriting process and how they approve potential borrowers.”
This blog is about how to improve your credit rating. Part I was about lenders’ criteria when they decide whether to give a small business a loan. Part III will be about how you can get a loan from a nontraditional lender. Part IV will be about the risk of accepting a loan from a nontraditional lender.
Tips For Entrepreneurs To Improve Their Credit Rating
“Your credit score has become your "SAT score" when it comes to financing. If you have a high score, you'll have a pretty easy time getting credit offers from a wide variety of funding sources. If your score is low or nonexistent, however, you won't." "Funding Options for Bad Credit Risks” Entrepreneur magazine
The Small Business Administration (SBA) points out in its “How to Prepare Your Loan Application” report that your credit history is so important that prospective borrowers should scrutinize their credit reports — their personal and business credit reports — before applying for a loan.
Lenders are most reliant on the credit reports completed by the credit agencies Equifax, Experian, and TransUnion. They’re all reputable, but mistakes are common so you should seek to fix the mistakes before lenders see them.
Besides your credit report, lenders also want to see your last three years’ personal and business income tax returns, current bank statements, signed financial statements, and a collateral document that details what property you are willing to pledge to give to the lender in case you can’t repay the loan, and legal documents that are pertinent to your business such as licenses, contracts and leases.
If your application for a small business loan is rejected because you have bad credit, you can improve your prospects for getting a loan in the future by improving your credit. The steps you can take to improve your credit include:
* INCORPORATE YOUR BUSINESS: The Fox article “How to Get a Business Loan With Bad Credit” reports that banks are more likely to loan money to an incorporated business than an unincorporated business. Incorporating gives you a chance to create an entity that can then establish a good credit record. The incorporated business should pay bills associated with the company, including utility bills that you might have paid in the past.
* OBTAIN A BUSINESS CREDIT CARD: Because of your past credit history, getting a business credit card might be difficult, but you might be able to get one with a small credit limit and a high interest rate. Such a card might be a good investment if you pay your bills on time for a long time. “Even if your personal debt is problematic, building a positive history of business transactions can enable you to establish a track record of creditworthiness,” according to the Fox article.
* TIGHTEN YOUR PURSE STRINGS: Now that you’ve been rejected for a loan, investing now to make money later might not be a feasible strategy. Watching every penny you spend might be a better short-term alternative so you can reduce your bills and pay them on time. Make sure your all your employees are productive or consider reducing your payroll. You should also consider buying fewer products at a time rather than buying more products and having excess inventory for a significant amount of time.
One thing you should not do — use credit cards as a substitute for a loan to expand your business. When banks made getting a loan more difficult during The Great Recession, the percentage of small businesses that used credit cards to finance daily operations increased to 59 percent, according to The New York Times.
You should also remember that successfully paying your bills for an extended period of time will eventually become more important than your past failures. In fact, the credit agencies will remove a bill collector’s action against you after seven years.
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