In the past bad credit when applying for a business loan usually only intended you would pay more in interest. That was bad enough, but now good credit is even more important. Bad credit can mean not getting a loan, needing a co-signor, or having to use your personal credit to obtain a loan. None of the three are great options and wise business owners prefer a simple, straight-forward business loan so getting credit, keeping it in good shape, and having great business performance records is important.
Impact of Bad vs. Good Credit on Loans
A good name, both in personal life, and professional life in the modern world has often revolved around your payment history. Even mildly bad credit reports have always meant paying more in interest. For a business that can make a big difference in the margin of profit so keeping credit scores healthy was a major focus. Make no mistake that is still the case today.
There is another impact of bad credit today. Many potential business associates will check into your credit worthiness before doing business with you. The old adage "you are judged by the company you keep" has begun to make its impact known in the business world and businesses do not want to be associated with companies that are fiscally irresponsible. It also makes sound business sense to not do business with a company that is likely to default on their end of a deal.
Credit Score Numbers
Business credit score numbers, just like personal credit score numbers, range. Credit scores are one time when high scores are better than low. The closer to 85 you are the better chance you will have of getting a loan, and a low interest rate. Even 10 points can mean extra interest.
With the economy being in difficult straights now, lenders are even more apt to frown on as little as a 10 point difference. They are more likely to require additional collateral, proof of backing in the form of a co-signor, or personal backing.
Why Not Go It Alone?
If you have a small business the temptation is to forego business loans and simply apply for a personal loan to back your company's needs. This can be a disastrous mistake. You are putting your financial well-being and that of your family on the line. Even the best business can run into trouble that ends with you losing your home and destroying your personal credit in the process.
Obtaining Business Credit
Business owners just starting out may not know how to go about getting good credit for their business as a separate entity. The first step if you have not done it already is to officially set up your business as a separate entity. For most small businesses that will be an LLC, or a corporation. This will provide you with an actual entity that can apply for loans and credit. Initial startup loans, small business loans, or even business loans that you personally secure are often the first step in building business credit. The key is to make sure they all report to the business credit agencies.
Personal loans can also be used. It may seem contradictory to advise a personal loan and it will not help your business credit if it is a simple personal loan. The key is to get the loan in your business name with yourself as a co-signor. This only works if you yourself have good credit. It is only safe if the loan is in an amount that you can reasonably afford regardless of your business circumstances. It may be necessary to jump-start your business credit.
Obtain credit from companies that you do business with. If you order all of your office supplies from one company request a business line of credit from them. Same with any other company you regularly do business with. Ask if they report to the credit bureaus, if they do not report, or only report if payments are missed that will not help you. You need to do business with businesses that report.
Credit cards issued in your company name only, are excellent forms of business credit building. There are credit card companies out there that specialize in helping businesses obtain credit cards for purchases like office supplies and equipment, business related travel, and other expenses. Paying credit lines on a timely basis will help to create credit in your company's name.
Business credit cards also allow you to keep all of your finances separate from that of your business. That can be a daunting task for small business owners, especially at startup.
Keeping Your Score Sparkling Clean
Just like in personal credit the steps to maintaining your credit score are as important as obtaining it in the first place. It is much better to keep your credit history in good standing than it is to attempt to clean it up once it has begun to slip.
Make payments on time. That is the most important method of keeping your report clean. Making payments above the minimum on credit lines adds extra impact to on time payments. As with personal credit there is also a deferred balance between having enough credit to judge, and having too much credit.
Having too many outstanding loans shifts your debt to income ratio which can affect your ability to obtain new loans regardless of how stellar your score is. Having too much unused credit can also make it difficult because lenders may fear if they give you a loan and you suddenly make use of all of your available credit you can become over-extended.
Cleaning Up A Credit Score Problem
It is important to keep a close eye on your credit reports to ensure their accuracy. Errors can occur and should be rectified to keep them from impacting your scores. If you find your business has fallen behind a bit on payments find a way to pay your minimum payments on time. The downside to cleaning up credit rather than keeping it in good standing to begin with is building up your score by making payments on time takes months, and even as much as a year of consistency before you will notice a change.
Small businesses, especially in the startup stage, often have difficulty obtaining traditional business loans. Once you have established your credit, however, it is much more likely that you will be able to walk into a bank and produce enough proof of stability in your company to procure a loan. That is the ultimate goal of establishing good business credit because business loans are the backbone of company expansion, development, and continued success.