One of the things a lender considers when they’re evaluating your business’ credit worthiness is your track record. So the age of your business credit profile will help a lender make decisions about your business. In other words, the more years of credit history that demonstrate your business can properly use and repay its business loan obligations, the better. Notice this history needs to demonstrate that your business can responsibly use credit and regularly meet its obligations in a timely fashion.
Your Credit Profile is Too Short—or “Thin”
If you’ve ever had a loan officer tell you that your business credit profile was too “thin,” what he or she is really saying is there isn’t enough credit history to accurately evaluate your business. When a lender looks at your business as a potential borrower, they’re trying to predict what the business will do in the future based upon what it has done in the past.
If your business has a positive track record of borrowing, making regular payments, and repaying debt in a timely manner, then past credit behavior tells a lender your business may be a better risk than an entity with a very short history or that is always late making payments.
As a result, if you’ve only been in business for a year or two, you’ll need to invest some time in building a strong credit profile. Additionally, if you have a less-than-perfect credit profile, there are no quick fixes. You’ll need to spend time rebuilding your profile.
Building, or Rebuilding, a Rock-Solid Credit Profile
Although there are no quick fixes, there are some things you can do (as well as practices you should avoid) starting today to build a profile that will help you access borrowed-capital when you need it in the future. Of course a great credit profile is no guarantee, but it may give you more options when you’re looking for a small business loan.
- Be patient: For starters, don’t believe anyone who tells you they can quickly fix your profile for a fee. There is no quick fix. What’s more, it’s against the law to take a fee to fix your credit profile before they actually fix the profile. Slow and steady wins this race. In other words, be ready to invest some time. Fortunately, 12 to 24 months of effort will be rewarded with improvement.
- Get acquainted with your credit profile: If you haven’t looked at your profile lately, it’s one of the first steps you need to take. Your business profile is made up of your credit history and details about your business taken from the public record. It will include information like your time in business, your industry, and other similar information. Making sure your information is accurate is critically important. Something as simple as misclassifying your business can put it in a higher risk category and make it harder to qualify for financing.
- Don’t use your personal credit for business purposes: In the earliest stages of starting a business, many entrepreneurs will use the equity in their home or personal credit cards to get things off the ground. Unfortunately, this does nothing to build your business credit profile and may even hurt your personal credit score. Separating you personal and business credit is an important step in creating a strong business credit profile. Applying for a business credit card or credit from your vendors and suppliers is a good way to establish business credit—and is relatively simple. Vendors often offer credit to their customers and if they report your good credit history to the appropriate credit bureaus it will help you build a strong track record.
- Make sure those vendors report your good credit history: It’s important enough to ask. If they don’t report, you might be building a good credit relationship with them, but it won’t help you build a strong credit profile. If they aren’t reporting now, encourage them to do so. And, it’s a good question to always ask when establishing new credit relationships. For example, many online lenders like OnDeck report to the bureaus while others like merchant cash advance providers typically do not.
- Use the credit you need and stay current: The best way to build a strong profile is to pay all your bills on time—that includes your utility bills. It doesn’t take many late payments in a row to quickly hurt your profile.
Building, or rebuilding, a strong business credit profile is one of the most important things you can do to access borrowed capital—and this can take time. These five suggestions will help you build a business credit profile that will provide you options when it comes time to apply for a small business loan.
Abraham Lincoln has been attributed with saying, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” Consider the time you spend building your business credit profile sharpening your axe.