The March 2016 Small Business Credit Survey, carried out by a handful of Federal Reserve Banks, brought to light the struggle that many business owners face when applying for a traditional business loan.
Only 50% of business owners that apply for financing are accepted for the full amount.
If your business plan involves future expansion and an eventual need for capital, then it is important to start developing and improving your business credit now. Many lenders use business & personal credit reports and scores to evaluate whether a firm will be approved for a loan, the amount of the loan, and the pricing. There are even scores that combine both the principal(s) personal credit scores with the business credit scores such as the FICO SBSS credit scores. The FICO SBSS credit score is used by the SBA and over 7000 other business lenders. This score evaluates risk for the purpose of a small business loan.
Many traditional lenders (including business banks) evaluate both personal and business credit as well. Although there are many options for getting business loans and even those with limited or poor credit may be able to gain approval for financing it is important to understand how pricing can also impact a firm’s profits as well as the amount of loan extended. With the right credit scores, business plan, and financials a company may save thousands on pricing and gain greater amounts of financing to generate increased growth and success. This is why focusing on having the best business credit is just as important as gaining excellent personal credit scores. Similarly to personal credit, to guarantee your business’ chance of procuring a loan and securing a low interest rate, it’s crucial to utilize and manage credit building methods.
You might think the simplest method to build business credit is to start using a business credit card, but normally this is not true. Some business credit cards wind up on personal credit reports since they are typically personally guaranteed. While many may not show up on personal credit initially it is a definite that if you default it will be reported to personal credit. Business credit cards are also excluded from the credit card act regulations – when congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, the business community was left out. This means that those with commercial credit cards are not offered that same protection as consumers; business owners can still face exorbitant fees, interest rate hikes, and questionable account practices. Since these protections are not offered through commercial credit cards and business owners typically have to offer a personal guarantee to open one, your commercial credit card can potentially destroy your personal credit rather than build your business credit. Too many business owners mix their business expenses with their personal finances; and while personal credit is still a factor when applying for a business loan, if your business has poor or no established credit you will either be denied or you may be able to procure a loan at a much higher cost.
There is hope if you are looking to build your business credit, making sure to pick vendors and creditors that report to the business credit bureaus when deciding who to use for company supplies and purchases is a smart choice. Leasing equipment can also be a good way to build business credit. By asking vendors and creditors if they report to business credit bureaus before signing up with them for services or financing companies can increase the benefits when making a choice. Since building the right business credit can lead to capital and pricing that can support growth and success it is essential to make the best choices in regards to building credit. Having the right team of business credit experts that can initiate success is paramount to growth.
Never blindly apply for credit without knowing where you stand with the bureaus, check your credit scores. This requires checking both your business credit score and your personal credit score; different credit cards require different credit strength, never apply for a card that will not accept your score this will waste an inquiry on your report. If you see any inconsistencies in your business credit report and scores or notice that your business does not have developed credit – reach out to one of our Credit Experts for a free credit analysis. We at North Shore Advisory, Inc. work with many small – mid size businesses to build, fix, and establish their credit through all business credit bureaus. We also specialize in personal credit improvement.