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Grow Your Business Finances

Need a Business Loan? How to Boost Your Credit Score First

Need a Business Loan? How to Boost Your Credit Score First
Credit: Casper1774 Studio/Shutterstock

When applying for a small business loan, your credit score is a major factor in determining whether you get approved. So entrepreneurs with bad credit can benefit from taking steps to boost their business' ratings.

According to Experian, one of the United States' three credit-reporting agencies, a credit score is a number that lenders use to help decide how likely it is that a loan would be repaid on time. In addition to the role these numbers play in the approval process, credit scores are also used to set the interest rates on the loans that lenders do pass out.

It is important to note that a business's credit score is different from a personal credit score. According to BusinessLoans.com, a personal credit score is a reflection of how someone repays their mortgage, auto loans, or other personal obligations, while a business credit score reflects how a business owner meets their company's financial obligations. While the two scores are different, lenders can look at both when deciding whether to approve a loan. [See Related Story: Best Alternative Small Business Loans 2016]

"Having a positive business-credit profile is extremely important because it presents a current, objective picture of how a business manages its financial obligations," Brian Ward, vice president for Experian's Business Information Services, told Business News Daily. "A negative credit profile can lead to higher interest rates, difficulty in securing loans and potential problems with suppliers, but a positive business credit profile can help save your business money by enabling the business to secure the best possible rates and terms."

Recent research shows that most business owners are in the dark when it comes to their credit scores. A study from Manta and Nav revealed that 72 percent of small business owners don't know what their credit score is and nearly 60 percent don't know where to find their credit score.

Editor's Note: Looking for information on business loans? Fill in the questionnaire below, and you will be contacted by alternative lenders ready to discuss your loan needs.

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Credit scores can range anywhere from 100 to 990, depending on the scoring model. Amber Colley, a business-credit expert and director with Dun & Bradstreet, said since there isn't a definitive "good score" business owners should be aiming for.

"There is not necessarily one score that is more important than others or that you should completely disregard," said Amber Colley, a business-credit expert and director with Dun & Bradstreet. "It depends on what scores your lender uses to make its decisions. " 

Since there isn't a specific number that businesses have to achieve, the best strategy is for business owners to focus on managing the factors that help build positive scores, Ward said.

"This is done by monitoring the business credit report on a regular basis to help verify the information and be educated to what drives changes," he said.

Colley and Ward said there are several ways that business with bad credit scores can improve their ratings:

1. Pay bills on time: Colley said the most important thing you can do as a business owner to boost your business credit score is to pay your bills on time.

"The amount of payment experiences recorded in your report that show your historical ability to meet your vendors' payment terms, along with the amount of high credit you have been extended by those vendors, are important components within your business credit report," Colley said.

2. Pay down current balances: Ward said another way to improve a credit score is by paying down balances on commercial accounts and credit cards as much as possible.

3. Keep tabs on your credit score: Colley advised business owners to pay close attention to their credit report in order to see changes to their scores and ratings as they happen.

"Monitoring your company's credit information can allow you to react and update or confirm the information being reported about your company," Colley said. "This, in turn, can allow you to be proactive versus reactive in managing the information within the report."

Other tips from Experian include applying for and opening new credit card accounts only when necessary and avoiding closing unused credit-card accounts. Owing the same amount but having fewer open accounts may lower your credit score, Experian said.

But there is no set time frame for how long it will take a business or business owner to improve a credit score, Colley said.

"There is no definitive answer to this question," she said. "What information is being updated, added, disputed or confirmed could dictate how long it may take for information (scores/ratings) to change within the report."

If you are interested in learning more about small business loans, check out our guide to choosing the right small business loan. If you know you want a loan from an alternative lender, we would encourage you to review what we recommend as the best alternative lenders for various types of loans

Editor's Note: Looking for information on business loans? Fill in the questionnaire below, and you will be contacted by alternative lenders ready to discuss your loan needs.  

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Chad Brooks

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.