Having a strong personal credit score is essential if you’re hoping to obtain a small business loan. Lenders will use your credit score as one factor in deciding whether to approve your loan request, so it’s important to make sure your score is as high as possible before applying. There are a few simple steps you can take to improve your credit score and increase your chances of getting approved for a small business loan. Before we discuss how to improve your credit score let’s discuss how a personal credit score can affect getting approved for a business loan.
What personal credit score factors do Business Loan Lenders look for?
Business loan lenders will often consider your credit score when deciding whether to approve your loan. Here are some of the most important factors they’ll be looking at:
- Your payment history – Do you have a history of making late payments? Or have you been consistently timely with your payments? Lenders will want to see that you’re capable of making regular, on-time payments.
- The amount of debt you currently have – Do you have a lot of outstanding debts? If so, this could negatively impact your chances of getting approved for a business loan. Lenders will want to see that you’re not overextended financially.
- The length of your credit history – A longer credit history will usually be viewed more favorably than a shorter one. Lenders like to see that you have a track record of responsibly managing your finances.
- The types of credit you have – Do you have a mix of different types of credit, such as revolving (e.g., credit cards) and installment (e.g., auto loans)? This can show lenders that you’re capable of handling different types of debt responsibly.
- Your credit utilization ratio – This is the amount of your available credit that you’re currently using. Lenders generally prefer to see a lower ratio, as it indicates that you’re not maxing out your credit cards or borrowing more than you can afford to repay.
By taking a look at these factors, business loan lenders will be able to get a better idea of your financial history and how likely you are to repay the loan. If you have a strong personal credit score, it could improve your chances of getting approved for financing.
Before looking at ways to improve your credit score let’s look at the breakdown of how a FICO credit score is calculated.
What is the Breakdown of Your FICO Credit Score?
A FICO credit score is composed of five elements:
- Payment History – 35%
Your payment history is the most important factor in determining your FICO score. Payment history includes information about whether you have made payments on time, and if you have missed any payments. late payments will negatively impact your score, while timely payments will improve it.
- Amounts Owed – 30%
Amounts owed represents how much of your available credit you are using. It is important to keep your balances low to maintain a good score.
- Length of Credit History – 15%
Length of credit history measures the length of time you have had active lines of credit, such as credit cards and loans. A longer history is generally better for your score.
- New Credit – 10%
New credit looks at how often you have applied for new lines of credit. This is important because it can be an indication of financial instability. Too many applications for new credit can hurt your score.
- Credit Mix – 10%
Credit mix looks at the variety of types of credit you have, such as revolving (e.g., credit cards) and installment (e.g., loans). A diversified mix is better for your score than having just one type of credit.
The percentages indicated above are approximate, and your FICO score may weigh the elements differently depending on your specific credit situation. However, payment history is always the most important factor. Therefore, it is important to make all of your payments on time and to keep your balances low. If you have a high FICO score, you are considered to be a low-risk borrower, which means you are more likely to be approved for loans and credit cards and to receive favorable terms (e.g., lower interest rates). A high score can also help you save money by qualifying you for discounts, such as insurance premium discounts.
A low FICO score indicates that you are a high-risk borrower and may be denied loans and credit cards or maybe offered less favorable terms. Therefore, it is important to manage your credit carefully to maintain a good score.
You can get your FICO score from the three major credit bureaus: Equifax, Experian, and TransUnion. You can also get your score from some financial institutions and lenders.
The average FICO score in the United States is 703. However, this number can vary depending on the specific population being measured. For example, the average score for people with good credit is 749, while the average score for people with bad credit is 669.
If you are interested in learning more about FICO scores, or if you would like to check your score, you can visit the official FICO website.
How to Improve Your Credit Score for a Business Loan Approval
Your credit score is one of the most important factors in getting approved for a business loan. A high credit score indicates to lenders that you’re a responsible borrower who is likely to repay your debts on time. Conversely, a low credit score could make it more difficult to get approved for a loan or line of credit and may result in higher interest rates and fees.
If you’re looking to take out a business loan, one of the first things lenders will look at is your credit score. This number is a key factor in determining whether you’ll be approved for funding, and it can also affect the terms and interest rate you’re offered.
There are a few things you can do to improve your chances of getting approved for a business loan with a good interest rate:
- Make sure your credit score is as high as possible. The higher your score, the better your chances of approval and getting a favorable interest rate.
- Keep your credit utilization low. Lenders like to see that you’re using a small percentage of your available credit, so try to keep your balances low.
- Make all your payments on time. This is one of the most important factors in your credit score, so be sure to always make your payments on time.
- Avoid opening new lines of credit before applying for a loan. Opening new accounts can lower your average account age, which can hurt your score.
- Check your credit report for errors and dispute any that you find. Errors can drag down your score, so it’s important to fix them before applying for a loan.
Following these tips can help you get approved for a business loan with favorable terms and a low-interest rate.
Having a great personal credit score can be just as important as having a great business credit score especially when it comes to getting a business loan. If you are looking to get a business loan, then Progressive Business Capital may be the answer.
Interested in learning more contact us at (800) 508-4532 or via email at [email protected].