You how they say everything in life is connected? It’s true. One thing affects another and another and another and before you know it, all the dominos have fallen. The same is true of the connection between getting a business loan, credit score, and fundability.
When it Comes to a Business Loan, Credit Score and Fundability Both Count
Most people only think about credit score when it comes to their ability to get a business loan. The truth, however, is much bigger than that. Credit score is important, but only in so much as it is a part of the bigger picture of fundability.
Business Loan Credit Score and Fundability: Understanding Fundability
What is fundability? In short, it is the overall ability of a business to repay debt, as viewed by lenders. If a lender sees your business as one that is fundable, they believe that you will be able to handle and repay the debt that they extend in a timely manner. Your business is seen as one that will profitable for them to lender to.
The thing that few business owners understand is, there is so much more to fundability than credit score. Lenders look at a number of things to determine whether or not they will approve a loan application. It’s true, when it comes to a business loan, credit score counts a lot. It’s not everything though.
How Business Credit Affects Fundability
To really understand the business loan credit score and fundability connection, it helps to think of fundability like a puzzle. Business credit is just one piece. It’s a little more complicated than that however. It is a very, very large piece, right in the middle, and it is made of little pieces all its own. It’s like a puzzle within a puzzle.
So yes, though many other things affect fundability, when it comes to a business loan, credit score is hugely important. This means it is vital to understand how to build business credit.
Establish Business Credit
Before you can build business credit, you have to first establish your business as a separate entity from you as the owner. This is a vital step in getting your business loan credit score where it needs to be. It is all in how your business is set up.
Separate Contact Information
Your business needs it own phone number and address. This doesn’t mean you need a separate building. You do not even need a different phone. You can get a phone number that works over the internet and will forward to the phone you are already using. For an address, you can use a virtual office. Some of these will even offer meeting spaces to hold face-to-face meetings.
The next thing you need to do is get an EIN for your business. This is an identifying number for your business that works in a way similar to how your SSN works for you personally. Some business owners used their SSN for their business. This is what a lot of sole proprietorships and partnerships do. However, it really doesn’t look professional to lenders, and it can cause your personal and business credit to get all mixed up. When you are looking to increase fundability, you need to apply for and use an EIN. You can get one for free from the IRS.
This is the most important step in fundability thus far. Incorporating your business as an LLC, S-corp, or corporation is necessary to fundability. It lends credence to your business as one that is legitimate. It also offers some protection from liability.
Which option you choose does not matter as much for fundability as it does for your budget and needs for liability protection. The best thing to do is talk to your attorney or a tax professional. What is going to happen is that you are going to lose the time in business that you have. When you incorporate, you become a new entity. You basically have to start over. You’ll also lose any positive payment history you may have accumulated as well.
This is why you have to incorporate as soon as possible. Not only is it necessary for fundability and for building business credit, but so is time in business. The longer you have been in business the more fundable you appear to be. That starts on the date of incorporation, regardless of when you actually started doing business.
Business Bank Account
You have to open a separate, dedicated business bank account. There are a few reasons for this. First, it will help you keep track of business finances. It will also help you keep them separate from personal finances for tax purposes.
There’s more to it however. There are several types of funding you cannot get without a business bank account. Many lenders and credit cards want to see one with a minimum average balance. In addition, you cannot get a merchant account without a business account at a bank. That means, you cannot take credit card payments. Studies show consumers tend to spend more when they can pay by credit card.
Building Business Credit
To build business credit, you have to get accounts reporting. This is how you get a business loan credit score that is strong. As you may imagine, getting someone to extend credit without first having strong credit can be quite difficult. There are a few options however. For example, you can talk to any vendors you may already be working with and ask if they will extend credit. Since you already have a relationship with them, they may be willing. Ask also if they will report your payments to the business credit reporting agencies. Then, your score will start to grow.
You can also talk to those service providers you already pay monthly like landlords, utilities, and phone and internet providers. They do not have to, but if you ask they may report your monthly payment to the business credit agencies. This can only help you build credit faster.
Credit Line Hybrid
This is a type of unsecured business credit financing. That means there is no need for collateral. Now, they will check your personal credit score, and it is best if you have established business credit. However, you can still use this to build business credit, even if you do not have good personal credit or business credit.
If you do not qualify, you can take on a credit partner who does qualify. Because the credit line hybrid will be in the business name, the payments will be reported to the business credit reporting agencies, and your business credit score will start to grow.
This is probably the easiest and fastest way to begin building business credit. However, do not be fooled into thing that just because it is easier and faster than the other options that it is either easy, or fast. All good things take time and effort and building business credit is no different.
Vendor credit comes from certain starter vendors that will offer net terms on invoices without a credit check. Of course, they will require other information to ensure they reduce their risk as much as possible. They may want to see a certain average balance in a business bank account, or they might want to see you have been in business for a minimum amount of time.
However, once approved for net invoicing, they will report your invoice payments to the business credit reporting agency and you will be off to the races. As your score grows, you will be able to qualify for more and more accounts with various creditors. As long as you handle the credit responsibly, your score will continue to grow strong.
Remember, business credit is only one piece of fundability, albeit a relatively large piece. What else affects fundability?
For a business to be legitimate it has to have all of the necessary licenses it needs to run. If it doesn’t, red flags are going to fly up all over the place.
These days, you do not exist if you do not have a website. However, having a poorly put together website can be even worse. It is the first impression you make on many, and if it appears to be unprofessional it will not bode well for you with consumers or potential lenders.
Other Business Data Agencies
In addition to the business credit reporting agencies that directly calculate and issue credit reports, there are other business data agencies that affect those reports indirectly. Two examples of this are LexisNexis and The Small Business Finance Exchange. While you may not be able to access or change the data the agencies have on your business, you can ensure that any new information they receive is positive. Enough positive information can help counteract any negative information from the past.
In addition to the EIN, there are identifying numbers that go along with your business credit reports. Some of them are simply assigned by the agency, like the Experian BIN. One, however, you have to apply to get. It is absolutely necessary that you do this.
Dun & Bradstreet is the largest and most commonly used business credit reporting agency. Every credit file in their database has a D-U-N-S number. To get a D-U-N-S number, you have to apply for one through the D&B website.
It may seem like a no brainer that all of your business information should be the same everywhere you use it. However, when you start changing things by adding a business phone number and address or incorporating, you may find that things slip through the cracks.
This is a problem. Tons of loan applications are turned down each year because of fraud concerns. When things don’t match up, lenders get nervous. Maybe your business licenses have your personal address but now you have a business address. Perhaps some of your credit accounts have a slightly different name or a different phone number listed than what is on your loan application. Do your insurances all have the correct information? If you use an ampersand in one place, you can’t change it to the word “and” in another. Everything has to be exactly the same everywhere.
Both your personal and business tax returns need to be in order. Not only that, but you need to be paying your taxes, both business and personal.
It is best to have an accounting professional prepare regular financial statements for your business. Having an accountant’s name on financial statements lends credence to the legitimacy of your business. If you cannot afford this monthly or quarterly, at least have professional statements prepared annually. Then, they are at the ready whenever you need to apply for a loan.
Often tax returns for the previous three years will be enough. Get a tax professional to prepare them. This is the bare minimum you will need. Other information lenders may ask for include check stubs and bank statements, among other things.
In addition to FICO reporting personal credit, you have ChexSystems. In the simplest terms, this keeps up with bad check activity and makes a difference when it comes to your bank score. If you have too many bad checks, you will not be able to open a bank account. That will cause serious fundability issues.
Personal Credit History
Your personal credit score from Experian, Equifax, and Transunion all make a difference. You have to have your personal credit in order because it will definitely affect the fundability of your business. The best way to get a strong personal credit score or improve a weak one is to make payments consistently on time.
You probably never considered this point. Many don’t. For example, think about the timing of your application. Is your business currently fundable? If not, do some work first to change that. Next, make sure that your business name, business address, and ownership status are all verifiable. Lenders will check into it. Then, make sure you choose the right lending product for your business and your needs. Do you need a traditional loan or a line of credit? Would a working capital loan or expansion loan work best for your needs? Choosing the right product to apply for can make all the difference.
Business Loan Credit Score and Fundability: It’s Not Too Late, Start Now
Wherever you stand with business loan, credit score, and fundability, its never to late to make a change. Taking all of this into account, get started now so you can ensure the best chance for your business to get the funding it needs.
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