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If you’re a small business and think your business credit is different from your personal credit, think again.
Unless your business generates millions in annual revenue, any loan you apply for will be based on your personal credit, not your “business credit.”
When I explain this to entrepreneurs, I’m usually surprised. Indeed, there is generally a misconception among entrepreneurs that there is a separation between their business credit and their personal credit. Some believe that a below average or poor personal credit score will not affect their ability to secure a loan for their business.
Unfortunately, that is not true. For most small businesses, the ability to receive credit is based on the business owner’s personal credit history.
However, all hope is not lost: you can still get a loan. Several small business financing options exist, even though the second-draw PPP expires on May 31. As the economy improves, now is the time for entrepreneurs to focus on their creditworthiness and better understand how credit scores are determined and what lenders currently are. look for when they extend credit.
Related: Here’s how to protect your credit score in 2021
Higher credit ratings — for now
How’s your credit score these days?
Of course, during an economic downturn, credit ratings drop. People struggle to pay their bills, miss payments, and max out their credit cards.
However, during the pandemic, the reverse happened: the average FICO credit score increased and reached an all-time high of 711 (out of 850) in July 2020.
How could this happen? On the one hand, borrowers may have been able to keep pace with payments thanks to federal stimulus payments, student loan forbearance programs and extended unemployment benefits.
Additionally, credit card companies and other creditors have been more understanding with customers due to the severe health consequences of Covid-19 and its effects on households and workplaces.
Now is a great time to check your FICO score and see where you stand. It may be higher than you think.
Your bank may even offer a credit monitoring service so you can see how your score may have changed recently – and a credit modeling service that can tell you how your score might improve given certain behaviors a credit card, etc.)
Steps to get a higher credit score
Credit ratings are constantly changing. Just because you missed a few credit card payments (or worse) years ago doesn’t mean your credit is beyond repair.
Some of these tips may be obvious, but others may not be so. Here are some small steps you can take to improve your credit score and speed up the process of getting a loan with better terms:
Correct the mistakes on your credit report. In fact, the Federal Trade Commission encourages you to do so. An error on one or more of your reports could artificially lower your credit score, preventing you from getting the loan you need. Errors can include negative things that should have “aged” your credit report, clerical/database errors, or even identity theft (someone taking out a credit card in your name and uses it).
Call your existing credit card issuers and ask extend your credit limits if possible. This can not only give you extra capital if you need it, but it immediately lowers your credit utilization (the percentage of available credit you actually use), thereby increasing your credit score.
Pay bills on time, even if it is not the minimum amount. Call the bank or lender and let them know that an upcoming payment will not be the minimum and make arrangements if possible. Late payments can stay on a credit report for seven years.
Limit the number of new firm credit applications on your report. These stay on a credit report for two years. As a workaround, ask if the lender can do a soft inquiry to see if you qualify for a loan.
Note that the biggest step you can take to improve your credit score is to simply pay off all your credit card balances and all your loans at once. Obviously, this is not feasible for many, especially small business owners who have been struggling for over a year.
Also, even if you could pay it all off at once, it would be unwise to tie up all your money at once.
Related: How to Boost Your Credit Score by 100 Points in 5 Months
Small business lenders require a personal credit score because they want to see how you’re handling your debt, which isn’t such a bad thing.
If you control your personal credit, you control your business credit. Your business will benefit from the steps you take to present the best insight into your personal finances.