Your credit score can make or break a small business’ ability to raise funds. For companies, bad credit can mean limited access to cheap credit or no access to fundability at all. Unless you opt for the alternative financing options.
Why Your Business Credit Score Is So Important?
A business credit score is one of the telltale signs of a person’s creditworthiness and a business’ fundability. Lenders look at credit scores to decide whether a loan applicant is too risky to do business with.
If you credit card is packed with late payments and/or defaults or your credit cards are nearly maxed out, you are less likely to get a business loan approved by a bank or the loan could come with a higher interest rate than it would with a pristine credit score.
Some of the events that may negatively affect your credit score include:
- Late payments (including rent and utilities)
- Excessively high credit utilization ratio
- Opening too many accounts
- Not having enough variety when it comes to the types of credit accounts you re currently using.
How Is It Calculated?
Credit reporting agencies such as TransUnion, Experian, or Equifax are not very transparent when it comes to how a business’ credit score is calculated. We do know that payment history is a large chunk of that credit score (35%) and so is utilization ratio (30%). Account history (10%), credit account variety (10%), and payment history (15%) also play a major part in deciding your FICO score.
Payment history is critical for your business’ fundability because lenders use this metric to see if you are trustworthy enough to make the payments on time. If you miss payments or you are late on making them, your credit score will be negatively impacted.
Utilization ratio is another important metric when calculating your business’ credit score. It refers to the amount of credit available to a business that is actually being used. A positive sign of financial responsibility for lenders if loan applicants’ ability to handle large amount of debt while making payments on time.
Account history is important because lenders like a long but varied credit history where you have various active accounts that are constantly used but there are no late payments. Across most credit rating agencies, account history accounts for 10% of the final credit score of a business.
However, the various accounts should not be opened all at once, unless you want an ugly stain on your credit report. Lenders consider opening multiple accounts over a short period of time a sign of financial irresponsibility.
One of the fastest ways to build business credit quickly is by obtaining an Employee Identification Number (EIN). EINs act as a social security number for businesses. Having one makes a business look much more professional and credible, which leads to a better chance of getting a loan or grant from a bank. EINs are one of the few ways to quickly build business credit. Read more about business credit and the other ways to build it quickly.
A healthy mix of credit accounts
A healthy mix of credit accounts includes auto loans, mortgage, and credit cards. So, think about it carefully every time you consider picking new credit as it may hurt your score if not timed correctly.
Alternative Financing Options for Businesses with a Bad Credit Score
If you have a bad credit score, main street banks may not be that eager to approve a business loan as you are by default considered a high-risk applicant. Fortunately, there are alternative financing options to traditional banking, such as the online lending industry.
For small businesses with less-than-stellar FICO scores, to keep the cash flow going, a business credit card such as the Revenued Business Card (check out https://www.revenued.com for more details) is one of the best financing tools they will be having access to.
Business credit cards usually also come with reward programs or other juicy benefits. The only major downside is that a personal guarantee may be asked from you for your application to be approved. They are also easier to get than secured business loans, but the principal is usually not that high since lenders still perceive you as medium- to high-risk applicant.
For larger loans, consider a secured business loan. For this financing option, you need to bring a collateral to guarantee that you will pay it back. Collaterals may include property such as buildings and vehicles, equipment, your business’ inventory, or your business’ rainy day cash cushion.
Getting approved for a bad credit business loan is not mission impossible as some business owners may think. There are plenty of alternatives to main street lending out there that care more about your business than your credit score. You’ll only have to find the one that is right for you.