When it comes to starting and running a small business, getting the necessary funding can often make or break your entrepreneurial dreams. The harsh reality is that traditional banks and lenders are generally very cautious about lending money to small businesses. They want to be sure they’ll get it back and one key factor they consider is your credit history. If your business or you, as the owner, have a poor credit record, they might not want to help you out.
What is a credit score and why does it matter?
When you, as a small business owner, apply for funding from banks or other financial institutions, they may initially rely on your personal credit score, especially if your business is new. This credit score, usually a number between 300 and 850, helps lenders understand how reliable you are when it comes to borrowing money.
To calculate your credit score, a formula considers different factors, such as your payment history, how long you’ve been using credit, the amount of money you owe, your debt levels, and the number of credit accounts you have. This information is gathered from credit reports created by credit bureaus, which collect data about your borrowing and payment habits.
Access to funding and expansion
One of the primary benefits of having a good credit score is the access it provides to funding. As a small business owner, you may encounter situations where you need additional capital to expand your operations, invest in new equipment, or hire more staff.
Lenders, such as banks and financial institutions, often rely on credit scores to evaluate the creditworthiness of a person or their business. A strong credit score indicates that you have a history of responsibly managing credit, which increases your chances of securing loans or lines of credit at favourable interest rates.
Additionally, a good credit score can help you attract potential investors who may be interested in partnering with or supporting your business financially. Investors are more likely to trust a business with a solid credit reputation, as it demonstrates your ability to handle financial obligations effectively. By building a good credit score, you open doors to various funding options that can fuel the growth and expansion of your small business.
What credit score do you need to get a business loan?
While personal credit scores do play a major role when it comes to institutions deciding whether or not to approve a business loan, lenders also consider various other factors. Nonetheless, having a low personal credit score can make it harder for you to get a loan.
Usually, a good personal credit score ranges from 640 to 700. The higher your score, the lower the perceived risk for lenders. Here’s a simplified breakdown of personal credit ratings (but please note that specific ranges may vary among credit bureaus)
- 700 or higher: This is considered an excellent credit rating, demonstrating responsible financial management and making you an attractive candidate for a business loan.
- 660 to 699: With this credit rating, you are still in a good position to access a variety of loan options. Lenders perceive you as a relatively low-risk borrower.
- 620 to 659: Falling within this range may pose some challenges when seeking financing for your business. While it’s still possible to qualify for a loan, you may encounter stricter requirements or higher interest rates.
- Below 620: Lenders view credit scores below 620 as high-risk. If your credit score falls within this range, it’s advisable to take steps to improve it before applying for a business loan. This may involve paying bills on time, reducing outstanding debts, and resolving any errors on your credit report.
It’s important to keep in mind that while your personal credit score matters, lenders also consider additional factors such as your business’s financial health, revenue, industry, and collateral when evaluating your loan application.
Therefore, even if your personal credit score is less than ideal, showcasing a strong business profile and providing supporting documentation can enhance your chances of obtaining a business loan.
How can you end up with a bad credit record?
Sometimes, you might not even realise you have a bad credit record until you apply for credit. This could happen if one of your accounts (or an account you co-signed for) wasn’t paid off and became delinquent. It could also be the result of someone stealing your identity and using it to create debt.
Another way your credit record can suffer is if you have a disagreement with a service provider over a wrong bill. If you refuse to pay until the issue is resolved, it could negatively impact your credit rating. If you find yourself in such a situation, it’s important to check with the service provider and make sure your credit record won’t be harmed while you work things out.
Boost your credit score with these simple tips
Pay your bills on time
You need to make sure that your bills are paid on time. Creditors want to see if you honour your contracts, so any late or missed payments can harm your score. If you fall behind, try to catch up as soon as possible.
Pay off your debts
Having a high amount of outstanding debt can negatively impact your score. Paying off your debts will improve your score and show that you can manage your finances. It’s best to make regular debt repayments, and paying more than the minimum amount is even better. If you can’t make a payment, contact your creditors right away and let them know.
Take the initiative to clear your record personally
Once you’ve paid off your remaining credit balances, it’s important to clear your record on your own. Reach out to a credit bureau and send them the proof of clearance that your credit provider gave you. This will speed up the process of clearing your record. Some providers may take up to 30 days to do this for you, but the sooner you take action, the faster your credit score will start to improve.
Close unused accounts
Having fewer credit accounts lowers your risk. So, if you have any accounts that you’re not using, it’s a good idea to close them. Even if you’re not using them, creditors consider the full credit amount available on your credit agreements.
Know your credit rating
In South Africa, you can get one free credit report per year from credit bureaus, and if you want additional reports, you can pay a small fee. TransUnion offers a free annual credit rating report.
Remember, your credit score is not fixed, and by following these tips, you can improve it over time.
Don’t let the fear of having a less-than-perfect credit score overwhelm you
If you’re concerned about your credit score not being in the best shape, don’t lose hope just yet. Traditional banks might not be the most suitable option for you, but there are other lending choices available, specifically designed to assist people who have faced challenges with their credit history.
Thinking about teaming up with Sourcefin as your go-to business funding partner? Just reach out to us. We’d love to chat and give you all the details about our funding options that could work well for you.
