When applying for a business loan, one of the most important factors lenders consider is your business credit score. A higher credit score not only increases your chances of loan approval but can also help you secure better terms, including lower interest rates and more favorable repayment options. If your business credit is less than stellar, don’t worry—there are several steps you can take to improve it before applying for a loan.
In this guide, we’ll explore practical strategies to help you improve your business credit and increase your chances of getting approved for the financing your business needs.
Lenders use your business credit score to assess the risk of lending money to your business. A higher credit score indicates that you have a track record of paying your debts on time and managing your finances responsibly. A lower score, on the other hand, may signal to lenders that your business is a higher risk, which can result in higher interest rates, less favorable terms, or even loan denial.
Credit Score: A higher score generally means better loan terms and lower interest rates.
Credit History: A history of on-time payments and responsible credit use boosts your credibility with lenders.
Debt-to-Credit Ratio: Lenders want to see a manageable level of debt relative to available credit.
The first step in improving your business credit is to know where you stand. Request a copy of your business credit report from the major credit bureaus—Dun & Bradstreet, Experian, and Equifax. Review the report for any inaccuracies or outdated information, such as missed payments or incorrect balances.
Check for errors: Ensure that all the information listed on your business credit report is correct, including payment history and credit utilization.
Dispute inaccuracies: If you find any mistakes, dispute them with the credit bureau to have them corrected.
Check your score: Understand your current credit score and set goals for improvement.
Errors on your credit report can negatively impact your score. Correcting them ensures that your business credit report is accurate and reflects your true financial standing.
Your payment history is one of the most significant factors that influence your business credit score. Late payments can severely damage your credit score, making it more difficult to secure financing at favorable terms.
Set up automatic payments: Automate payments for recurring bills to ensure you never miss a due date.
Prioritize overdue accounts: Pay off any outstanding debts as soon as possible to stop further damage to your score.
Negotiate with creditors: If you’re behind on payments, reach out to creditors to negotiate payment terms or settle for a lower amount.
Paying bills on time consistently demonstrates to lenders that your business is financially responsible, which can help boost your credit score.
The amount of debt your business carries relative to your available credit—also known as your credit utilization ratio—plays a big role in your business credit score. High credit utilization can indicate that your business is financially stressed, which is a red flag to lenders.
Pay down existing debt: Focus on reducing high-interest debts first, such as credit card balances or outstanding loans.
Consider consolidating debt: If you have multiple sources of debt, consolidating them into one loan can simplify repayments and potentially reduce your overall debt.
Avoid taking on new debt: Until your credit score improves, avoid adding additional debt that could increase your credit utilization ratio.
A lower debt load and reduced credit utilization demonstrate that your business is not over-leveraged, which is a positive signal for lenders when applying for a loan.
If your business is close to its credit limit on any credit cards or lines of credit, increasing your credit limit can help reduce your credit utilization ratio. A higher limit means you’re using a smaller percentage of your available credit, which can improve your credit score.
Request a credit limit increase: Contact your credit card issuer or lender to request an increase in your credit limit.
Be mindful of usage: Even with a higher credit limit, try to keep your utilization rate below 30% to maintain a healthy credit score.
Increasing your credit limit while keeping usage low demonstrates to lenders that your business can handle higher levels of credit responsibly.
Establishing trade credit accounts with suppliers or vendors can help build your business’s credit history. Trade credit allows you to purchase goods or services on credit and pay for them later, which can improve your credit score if you make timely payments.
Apply for trade credit: Reach out to vendors or suppliers to establish credit terms, such as net-30 or net-60 payment terms.
Pay on time: Ensure that all payments to suppliers are made on time to build a positive payment history.
Establishing trade credit accounts helps build a diverse credit profile, which is appealing to lenders when evaluating your business for a loan.
Using a business credit card responsibly can help improve your business credit score. If you haven’t already, apply for a business credit card and use it to pay for necessary expenses. Ensure that you pay the balance in full each month to avoid interest charges and build a positive payment history.
Apply for a business credit card: If you don’t already have one, consider applying for a business credit card that reports to the credit bureaus.
Make regular payments: Pay off your card balance every month to avoid high-interest charges and show responsible credit use.
Keep your balance low: Avoid maxing out your business credit card to maintain a low credit utilization rate.
Using a business credit card and making regular, on-time payments helps demonstrate your business’s ability to manage credit, which can boost your credit score over time.
Building strong relationships with your bank and lenders can be beneficial when applying for loans. A positive relationship can lead to easier approval for future loans and help you secure better terms.
Open a business bank account: If you don’t already have one, open a business checking account to establish a relationship with a financial institution.
Maintain good communication: Stay in touch with your bank or financial advisor and inform them of your business’s financial progress and challenges.
A strong relationship with lenders can improve your chances of securing financing when you need it, as lenders will have a better understanding of your business and its financial health.
Improving your business credit before applying for a loan is essential for increasing your chances of approval and securing better loan terms. By reviewing your credit report, paying your bills on time, reducing debt, and taking steps to improve your credit utilization, you can build a stronger business credit profile.
Taking these steps early on will give your business a solid financial foundation, helping you secure the funding needed for growth and expansion.
Start by reviewing your business credit report, and take action today to improve your credit standing. With a healthier credit score, you’ll be in a better position to secure the financing your business needs to thrive.