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