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6 Tips for Improving Your Business Credit Score

Are you thinking of launching a business? Or do you want to expand your product line, upgrade your technical capabilities, or beef up your advertising? If any of that requires financing, then your first step should probably be improving your credit score.
Financial Preparation
Guest Post by Susan Doktor, Principal at Branddoktor   May 12, 2021
 

We’ve all heard the dire news about the effects of the global pandemic on small businesses. While economists are predicting that financial recovery is close on the horizon, earlier in the crisis, some estimates placed the rate of small business closures at 800 per day. But there’s another, happier side to the story. According to the Wall Street Journal, the number of new small businesses founded during 2020 — some 3.2 million — far surpassed 2019’s record of 2.7 million. And many of these businesses relied on small business loans to launch their new ventures. Established businesses also depended on borrowed money to help them stay afloat, most notably through the Paycheck Protection Program.

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Are you thinking of launching a business? Or do you want to position your current business for success in the new economy by expanding your product line, upgrading your technical capabilities, or beefing up your advertising? A small business startup loan may be the solution. But many small business owners face an obstacle when applying for a loan. They have less-than-ideal credit histories and, therefore, don’t meet the eligibility criteria lenders establish for small business borrowers. That’s why you want to understand your credit position fully and take steps to improve it before you apply for a small business loan.

Credit Repair Tip Number 1: Take a Look in the Credit Mirror

Credit score.

You can’t fix a problem you don’t know you have. As a small business owner, the first move you should make before approaching a lender is to download a free copy of your credit report. Or we should say credit reports. There are several credit bureaus that assess your credit — Transunion, Experian, and Equifax are the big three — and you should have a copy of each bureau’s report to get a clear picture of where you stand and what you need to fix to improve your credit.

Lenders also look at another measure of your credit: your FICO® (Fair Isaac Corporation) score. Many banks, credit unions, and credit card companies, including Discover, CitiBank, and American Express provide their customers with their FICO scores for free, so check to see if you can use a resource you already have to find out yours.

Credit Repair Tip Number 2: Understand How Your Credit Score is Calculated

Each credit reporting bureau uses its own unique calculus to determine your score, but many factors overlap across all bureaus. For example, FICO scores are calculated using five criteria, and each is weighted differently in determining your magic number:

  • Credit payment history = 35%
  • Amount of money you owe = 30%,
  • Length of your credit history = 15%
  • New credit =10%
  • Credit mix = 10%

If your aim is to repair your credit, it makes sense to address those factors that figure most prominently in establishing your score.

Credit Repair Tip Number 3: Mistakes are Common

You’d like to think that companies who have the important responsibility of assessing your credit — and can influence your financial future in myriad ways — are spot-on accurate in their reporting. But the truth is, they’re not perfect. That’s why, once you have your credit reports in hand, you have to study them in detail. Your report may contain mistakes, from misreported late payments to credit accounts you’ve closed or even credit accounts you don’t recognize. If you find any of that last type of mistake, that may be an indication that your identity has been stolen. That’s a very serious situation. If you suspect identity theft, you have a lot of important work to do — and fast. To limit the damage to your credit and your finances overall, you should start by contacting all of your creditors — especially those with whom you’ve never opened an account — to secure legitimate accounts and close the bogus ones.

Some credit report errors aren’t that dire, but that doesn’t mean they’re not dragging your score down. See to it that they are all corrected, and you will probably see a considerable increase in your score. But to be frank, that’s easier said than done. It may only take a minute for a mistake to sink your credit score, but it takes a lot of time and patience to correct one. Many borrowers don’t have enough of either, so they turn to professional credit repair companies to take on the task. These companies use artificial intelligence and automation to address problems with your credit and can be very helpful, particularly if you find a lot of mistakes in your report. Unfortunately, you can’t fix any individual mistake on all four credit bureau reports in one fell swoop. You must contact each one individually, in writing, then wait for each company to respond. Another response on your part may be required. That’s a lot of letter writing, and the process of successfully disputing even one mistake can take some months. So it may make sense for you to hire a professional. Now that credit repair companies increasingly rely on technology, professional credit repair has become more affordable, too.

Credit Repair Tip Number 4: Avoid Credit Repair Scams

Credit repair scams.

While many credit repair companies are strictly on the up and up, others are shady at best and predatory at worst. With more businesses suffering economic hardships during COVID-19, you can bet that the scam artists are out in force, trying to take advantage of businesses who find themselves in desperate straits. So before you engage a credit repair company, check for signs that may indicate that a service is less-than-respectable. These include promising unrealistic results. Stay away from any company that tells you they can have a bankruptcy or accurate late payment information removed from your credit report.

Credit Repair Tip Number 5: Take the Steps Only You Can Take

We’ve already discussed the harm that errors in credit reporting can do to your credit score. But if your credit report is accurate, no judgment here. It’s not uncommon to fall behind on payments or rack up high balances when the economy is as tough as it has been recently. But you may be able to undo some of the “self-inflicted” damage that’s depressing your credit score. Here’s how:

  • Remember how FICO figures your score? The biggest credit score boost you’re likely to gain is the one you’ll get by bringing all of your credit accounts up to date and keeping them that way. Prioritize satisfying your creditors. Skip dinners out. Put off purchases that aren’t strictly necessary. Do whatever you have to do to meet the minimum payment due on each of your credit accounts.
  • Understand where your money is going each month. Individual credit accounts come with different interest rates, so focus on paying down those balances that cost you the most to carry.
  • If you haven’t been using an account and it still appears on your credit report, consider closing it down. This includes all of the store charge cards you were tempted to open because you could save 10% on your first purchase. Too many open accounts can be detrimental to your credit score. Close the ones you no longer use. Choose which accounts to close judiciously, though. Pick the ones that offer you the smallest credit lines. Why? Take one more look at the FICO score criteria we’ve discussed. FICO likes you to have a lot of available credit that you’re not using. A low credit utilization ratio can increase your score overall.
  • Sometimes, we have to adjust our bill-paying schedule to coincide with monthly cash flow. It’s not uncommon to put off paying bills that don’t come with heavy late payment penalties, like our utility and cell phone bills. But if you’ve been consistently on time in paying your rent, your water bill, or even your internet service provider, you may be able to add those accounts-in-good-standing to the list of accounts credit bureaus monitor. Contact each of the credit monitoring bureaus and request that those accounts be tracked and considered as part of your payment history. If you decide to hire a credit repair company, that’s usually a service they can perform for you. You won’t see as large an uptick in your score as you will by bringing all of your accounts up to date, for example, but it might be enough of a bounce to put you in a better credit bracket and earn you lower interest rates on any loan you decide to take out.  

Credit Repair Tip Number 6

Quite simply, don’t despair. Improving your credit isn’t a quick or easy process, but it can be done. What’s more, there are lenders who will consider you for a small business loan even if your credit isn’t perfect. You may be able to get a loan by offering collateral to secure it. Factoring, also known as accounts receivable financing, might be another solution to consider. Factoring allows you to borrow against the money your customers owe you. Your lender will take a fee — typically about 20% of the face value of your invoices — but will also pursue payment of your outstanding invoices for you. Qualifications for accounts receivable loans are considerably more lenient than for other types of small business loans.

At Lendza, we’re committed to working with every customer to find the most affordable small business financing solution. Whether you need funding now because you’re strapped for cash, or you want to make a long-term, strategic investment in your business, our site can help you search for a product for your needs while helping you secure your future.

 

Author Bio:

Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide array of topics, including finance, technology, and marketing. Follow her on Twitter @branddoktor.