Getting a new business loan for your SME is no mean feat. You need to have a few documents in place to be eligible for a loan. Lenders conduct a thorough background check of individuals who’ve applied for loans to assess their ability to repay within a stipulated timeline. Checking business credit scores is an integral part of analysing the credibility of businesses, proving to be a major deciding factor for being eligible for loan application.
Personal credit scores are evaluated when you apply for loans for your personal needs like purchasing a car or home etc. On the other hand, business credit scores are solely for funding your business.
Even if your personal credit score is not very positive, there are ways that will help you ensure that it does not adversely affect your ability to be eligible for a business loan. Here’s how.
1. Get your business legally registered
The first step towards ensuring a good business credit despite having a bad personal credit is to get your business registered as a corporation or Limited Liability Company (LLC). This will not only let the credit bureau know about the existence of your business but also help you create distinct personal and business identities. Apart from getting your company legally registered, establish its identity further by applying for an address that is different from your residential address, a separate phone number and bank accounts solely for your business transactions. Execute a professional business plan and get a business license. Last but not the least, keep a stringent track of your financial records like tax return documents, and income and balance sheets.
2. Pay on time to improve your personal credit
Your payment history with lenders, vendors and credit card issuers determine your business credit score. It is essential for you to pay by the due date, so your credit score does not get affected. Late payments get reflected on your business credit reports, reducing your chances of getting business loans sanctioned in the future. The impact of late payments on business credit score is more adverse than personal credit score. A late payment may not reflect on your personal credit score unless you have fallen behind by more than a month. However, a late payment of even a few days reflects negatively on your business credit score. Paying earlier has its benefits. The earlier you pay, the better will be your business credit score.
3. Make the most of trade credit
Also referred to as business-to-business credit, trade credit is the leading source of business loans worldwide. It is one of the primary resources for furnishing an office and while coordinating with vendors and suppliers. Make sure that you repay the entire trade credit amount on time to ensure that your creditor sends a positive payment history report to the business credit bureaus. Business credit score is measured on a scale of 0 to 100, which is in sharp contrast to the personal credit score scale of 300 to 850. A business credit score of 75 and above is considered to be a good score for being eligible for loans. After you have accumulated some trade credit, you can approach a lender for a new business loan.
Keep the above ways in mind to enhance your chances of getting a quick approval for your business loans.