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Your Credit History Can Affect Raising Startup Capital
Financial mistakes can hinder entrepreneurs from fulfilling their vision in the marketplace. Since the financial crisis in 2008, banks have cut back on how much money they have been willing to give small businesses.
Fortunately, loans to small and medium-sized businesses have begun to rise again, but it’s a slow process and many entrepreneurs may still find it difficult to raise the money they need to start a new business. Still, statistics on how much banks are willing to loan out are fairly dismal, with only a little over 10% of entrepreneurs getting approved for a business loan.
What are some steps, entrepreneurs can take to ensure that they fall into this small percentage group?
Here are 5 suggestions:
1. Think like a banker.
You may not get a bank loan not because there is anything wrong with your business plan, but because you have a low personal credit score. Your past credit history rather than your new business idea is to blame.
Bankers use your credit history to make a simple deduction: if you know how to handle your personal finances then you can be trusted to manage your business finances well, too.
Often lenders do not take into account that your credit score may be low because you needed to try out a number of ideas to find out what worked before presenting your idea to them. Bankers do not link learning from trial and error as one of the main reasons entrepreneurs finally become successful. Along your journey to becoming a good entrepreneur, you may have taken some hits to your credit score by starting a number of businesses and these past failures are now considered a blemish on your record.
2. Find out your personal credit score before asking for a business loan.
Your personal credit score, called a FICO score, rates your credit risk on a scale of 300 to 850. It’s calculated based on numerous factors, including the length of your credit history, your level of debt, and how well you managed past payments.
If you have a low credit score and want to improve your chance of getting the capital you need from a lender, you should first boost your personal credit score. In fact, it’s advisable not to send in your loan application form until you first take this step.
In some case, simple steps to boosting credit scores will be to pay off debts, catch up on late payments, and apply for new credit cards and pay them off in full and on time every month. Often, however, it’s not this easy to fix credit scores.
3. Fight back against unfair delinquencies.
Once you get your credit score, you will be able to see your credit rating and it will give you some options to improve your credit score if it’s low.
One option, for instance, is that you can add your comments to your credit report. Many people do not know that there is a place in your credit report where you can leave comments. You can use this area to dispute, defend, or justify any delinquencies. While some delinquencies may be reversed using this method, it may not work for all of them. Consequently, when it comes to credit repair services, it is often advisable to work with a business that has considerable experience and expertise in implementing a process of checking credit reports, challenging errors, and initiating changes.
4. Build your business credit separately from your personal credit.
You may have started to use your personal credit to build your first few businesses because you didn’t have any other forms of credit at the time. However, it’s not too late to remedy this situation by building more credit for your business and taking on less credit responsibility for yourself. After you get your tax ID number and get a legal identity for your company, you have an opportunity to build the credit of your business. Good business credit may assure lenders and suppliers that you qualify for their credit lines.
5. Pay off your old bills.
You may have forgotten to pay off some old bills or did not have the money at the time. These unpaid bills are now harming your credit scores and preventing you from asking for new lines of credit. So, basically, clear the old to make way for the new.
If you are not able to raise your credit scores, it’s not the end of your business aspirations. You may actually be able to talk your way into getting credit. In an article in Entrepreneur on using credit cards to finance your business, Asheesh Advani offers the following words of wisdom, “Keep in mind that if you’re establishing a credit line with a community bank or local small-business lender, there may be some room for negotiation. For example, it’s possible to request that certain personal assets be excluded from the guarantee or that the guaranteed percentage of the loan declines as the business matures or surpasses a certain net-worth threshold.”