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Updated: July 12th, 2020
It doesn’t matter how long you’ve been in business, building and maintaining a strong credit profile is an important part of qualifying for small business financing. This is particularly true in the post COVID-19 world we live in today. What’s more, this is not only true for your business credit profile, but your personal credit score will be a part of just about every creditworthiness evaluation you will experience as a small business owner.
What we’re seeing today looks familiar to many of us who have lived through recessionary times before. Following the financial crisis in 2008 for example, many lenders lowered credit limits on their customer’s lines of credit, tightened their lending criteria, or stopped making small business loans altogether. This was disproportionately true for the smallest small businesses and took a few years before we saw much improvement. The biggest and most creditworthy businesses were finding success with small business-borrowing two or three years before many of their smaller, and less creditworthy, small business peers.
That isn’t to say there weren’t options. It was at that time many online lenders and other alternative lenders captured more of the market. They evaluated creditworthiness differently from traditional business lenders like banks and credit unions, but access to that capital came at a cost. Many of those options were more expensive than a low-interest term loan from the bank. The trade off was a quick approval process (days instead of weeks) and funding as quickly as within a few days more.
The biggest difference between this new breed of lenders and the traditional lenders of 20 years ago, is that these new financing options require a more savvy borrower to take advantage of a lot of lending that targets specific use cases and carries with it a higher cost. This is still true today. Equipment financing, factoring, merchant cash advance, and other short-term financing won’t meet every business need, but they will be some of the few financing options available during a recession, so borrowers need to be asking themselves, “What am I borrowing for?” before they start talking to lenders. The answer to that question will help them know where to look for a loan, how much money to ask for, evaluate their personal credit situation, and determine if they have the cash flow to make periodic payments and whether or not the cost of the financing makes sense for their business.
Even though this new breed of lenders looked at creditworthiness with a different paradigm, they still relied on the credit reporting agencies to give them insight into what borrowers had done in the past so they could make decisions about what they would likely do in the future. In other words, during times like we are facing now, your credit profile is more important than ever before.
If nothing else, the crisis caused by COVID-19, the Paycheck Protection Program (PPP), and the Economic Injury Disaster Loan (EIDL) program illustrated the importance of building and maintaining a strong credit profile. There were numerous small businesses in need of PPP or EIDL funds that were turned away—even though the SBA relaxed the qualification requirements for a loan guarantee.
As a small business owner, in addition to your business credit profile, your personal credit score will likely always be the part of any business loan application decision. With that in mind, there are some things you need to know about your personal credit score, how it’s calculated, what you can do to improve it, and how it impacts your business loan application.
Although there are slight variations among the different personal credit reporting agencies, your personal credit score is based on the FICO score and represents five important metrics you should pay attention to.
Knowing the metrics is the first part of this one-two punch. Monitoring is the second part. We tend to impact the things we pay the most attention to, and this applies to both your personal and business credit. In addition to building relationships with the individual credit bureaus, there are some free options available you should be aware of.
For starters, Chane Steiner, the CEO of Creditful.com says, “While the pandemic is hurting many people financially there is one thing to keep in mind: The CRA’s unanimously agreed to extend free credit reports via annualcreditreport.com to consumers on a weekly basis through the end of 2020 (normally accessible once per year for free).”
Regardless of how long you’ve been in business, you have a business credit profile that includes detailed information about your business and your business credit history—including how you pay your utility bills, make payments on your business credit cards, along with how you pay your suppliers and other creditors.
Like your personal credit score, the first step to building a strong business credit profile is monitoring. Unlike your personal credit score, your business credit is usually a collection of scores and reports that detail your credit history along with how your business compares to other businesses of similar size, other businesses in your industry, other businesses with a similar number of employees, and other businesses in your region. Nav offers a view into both your business and personal credit history for free.
Although your personal score is considered private, your business profile is public to anyone who wants to see it. The basis of your score is whether or not the majority of your credit interactions are positive or negative. The goal here, like the primary metric on your personal credit score, is to meet all your business obligations as agreed upon.
If you have a less-than-perfect business credit profile, here are four things you should be doing to maintain a strong history during a recession like we’re experiencing today.
When I owned my own business I occasionally had to rob Peter to pay Paul—but I never faced the challenges small business owners face today. Surviving and thriving in the post COVID world will require creative problem solving and grit. It will also require the discipline to stay on top of your credit obligations to maintain, and even strengthen, your credit so you’ll have access to borrowed capital when you need it.
A strong credit profile might not be a guarantee that you’ll be able to get the business loan you’re looking for, but it will put your application at the top of the pile and give you more options than a business saddled with a lackluster credit history.
Ty has been writing about small business and the business finance topics that impact a business’ bottom line for almost 20 years. With over 35 years in the trenches as a Main Street business evangelist, author, and marketing veteran, he makes the maze of small business finance accessible by weaving personal experiences and other anecdotes into a regular discussion of some of the biggest challenges facing small business owners today.