Businesses, especially small enterprises, rely on cash flow to operate and upon revenue to survive. The problem is, you cannot have one without the other. Very often, credit mistakes and funding choices can come back to haunt as a lower credit score. In this article, we’ll go over how easily that can happen, and how to remediate it.
Often during the initial years of a firm, its bills are generally paid by credit sometimes to the extent of a card’s limits. When the company needs a loan to grow, traditional lenders will look at the business’ assets vs debt load and the major shareholders’ credit scores to consider its creditworthiness. At this point, too much debt, and scant profit to offset it, coupled with a FICO that is lower than 700 are major red flags. For many small businesses, the very strategy they used to get them ahead, seems to be coming back to haunt them in the form of financing rejections. Fiscal responsibility begins with a higher FICO. The following is a sound strategy for getting your numbers up and your business moving towards fulfilling its business objectives:
Increase Your Credit Limit
The Debt-to-Limit ratio is one metric that lenders consider during the loan approval process. It is also used to determine your credit score. This is news to many business owners who use their personal credit cards for business expenses. Asking your credit card company for a limit extension may not bear fruit at first. However, watch your inbox for follow-up emails that offer the very relief you were seeking. Funny how things sometimes ‘work’ that way.
Timing Is Everything
To raise your credit score, it is a given that your business’ and personal credit card bills must be paid on time. Just not at the time you think…sign up to monitor your credit report through the top credit reporting agencies such as Experian. Next, learn when your bank reports your balance to that credit agency. In other words, your card’s monthly bill may be due on the 20th of the month, and you try to pay it in full. But your bank reports to the credit agency on the 15th. So to show a negative balance you’d have to pay your card in full several days before the 15th of the month. It’s that pesky Debt-to-Limit ratio rearing its head again. Credit bureaus reward cardholders with less than 10% credit debt. This is the fast way to a higher FICO and can add up to 30 points in a single month following this very simple procedure.
Is That Right?
Once you are familiar with monitoring your credit report, it is less scary and very informative. You may also uncover mistakes including out-dated information and remediated debt that still presented as an open loan. Take charge of your credit and be sure to fix any errors to further boost your score. All you have to do is contact the agency with documentation that the loan was satisfied, or that you are not THAT John Smith.
Does Your Business Need It?
It is something of a mantra to this writer, but usually, it is not what you earn, it is what you keep. Do not waste business profits through needless spending. Be scrupulous about the purchases you make from paper clips to office furniture. Always ask yourself, does the firm need this? Is there somewhere it can be found more cheaply such as the secondary market? As for big-ticket items such as office furnishings, if one’s firm works with the public, there are scores of options. Rather than digging deep for an impressive designer workspace, hire remote workers, and ‘rent’ office and/or conference space in a furnished facility to give that great first impression. Another trick is to have one room in your facility that is impressively decorated and teleconference with prospects. Separate your business wants from what your firm really needs to operate and you’ll pare down company expenses from the get-go.
Keep Satisfied Loans ON Your Credit Report
Once they’ve paid off their loan, most businesses rush to rout any old loans from their report. In fact, keeping fully-executed loans in place will increase your overall score as it demonstrates responsible credit handling.
Good to Know:
BTW: in most cases, checking your credit report will not affect your credit score. Consumers’ reviewing their own FICO are called a “soft pull” with little or no impact. When a bank or lender performs a credit inquiry, however, that’s a “hard-pull” which drops points off your score. When you apply for a loan is not the time that any potential borrower wants to see their FICO drop. So the workaround is to find out what your lender will need from your credit reporting agency and pull the paperwork yourself. Present this documentation at the time you apply for a business loan and you’re home free.
Follow these simple steps and not only will your credit score increase but with it, your chances and ability to access additional capital to attain your business goals.
