It may come as a surprise, but your personal credit score is one of the most important factors that lenders consider when reviewing your application for a small business loan. Yes, you heard that right! When applying for a business loan to grow your business or make strategic decisions, your personal credit score will be one of the driving factors that determine whether or not you get approved for the loan.
If you’re wondering why your personal credit score matters, there are a few reasons it’s weighted so heavily. First, unlike a business credit score, your personal credit score follows you for your entire financial history, as opposed to just the business’s financial history. Secondly, it’s not uncommon for sole proprietors to use their personal funds or personal loans to fund business endeavors when starting out, so your personal credit history is the one that reflects those actions. Lastly, if your business is on the newer side, it may have a limited business history, while your personal credit history will have years of records to base decisions on.
Cleaning Up Your Credit Score to Secure a Business Loan
If you don’t have a perfect credit history, it’s important to improve your credit score to the best of your ability before applying for a loan. For many lenders, United Business Funding included, the lowest credit score that will be accepted for loan terms is 650. Usually, a higher personal credit score will lead to more favorable interest rates and repayment terms. Here are some ways to improve your personal credit score:
• Run a credit report to understand your starting point.
The last thing you want when applying for a business loan is a surprise call from the lender telling you that your personal credit is too low to qualify. Before applying for the loan, get a current credit report so you know exactly what your score is. Many credit card providers will run reports for free, or there are online services you can use to get an updated credit score.
• Ensure all credit card payments are made on time.
This is a MASSIVE requirement in maintaining a healthy credit score. One of the biggest factors in an individual’s credit score is whether or not their payments are made on time. This means credit cards, student loans, mortgages, and other types of debt payments that you’re responsible for. Always, always, always be on time. Set up auto-pay if you’re prone to forgetting!
• Refrain from utilizing large portions of your available credit.
If you have a credit card with a $12,000 limit and you consistently have $11,000 of that limit used, it could negatively impact your credit score. Try to keep your credit utilization to around 1/3 of the limit. This means you should plan on paying back more than the minimum amount required most months. If you can pay your monthly bill off in full, that’s even better!
• Keep old credit accounts open to show longevity in your credit history
Your “credit age” is a factor many people don’t know about. If you keep opening new cards or lines of credit, you’re going to have a lower credit age, and therefore a lower credit score, than if you can keep a few lines of credit open for many years.
Securing a Loan with United Business Funding
Small business loans can be critical to the success of your business, and United Business Funding wants to help all small businesses succeed. However, we can’t even cross that threshold if your personal credit score isn’t high enough. As frustrating as it may be, your credit score and the health of your business will likely always be linked in some fashion, so be sure you’re taking proactive steps to maintain a high credit score. If you have any more questions about the loan offerings at UBF or want a free quote, visit our website today!