Why Is My Personal Credit Score Used to Qualify for a Business Loan?

Tips and tricks to improve your score and help you get the loan that you need.

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If you’re a small business and you think that your business credit is different from your personal credit, think again. 

Unless your business is doing millions in annual revenue, any loans you apply for will be based on your personal credit, not your “business credit.”

When I explain this to entrepreneurs, I’m usually met with surprise. Indeed, there’s usually a misconception among entrepreneurs that there is a separation between their business credit and personal credit. Some think that a below average or poor personal credit score will have no bearing on their ability to get a loan for their business.

Unfortunately, this is not true. For most small businesses, the ability to receive credit is based on the business owner’s personal credit history.

However, all hope is not lost: You can still get a loan. Several small business funding options exist, even though the second-draw PPP expires on May 31. As the economy improves, now is the time for entrepreneurs to focus on their creditworthiness and to understand more about how credit scores are determined and what lenders are currently looking for when they extend credit.

Related: Here’s How To Protect Your Credit Score In 2021

Higher credit scores—for now

How is your credit score these days? 

It stands to reason that in an economic downturn, credit scores plummet. People struggle to pay bills, miss payments and max out credit cards. 

However, during the pandemic, the reverse actually occurred: The average FICO credit score increased and hit a record high of 711 (out of 850) in July 2020.

How could this happen? For one, borrowers may have been able to keep up with payments because of federal stimulus payments, student-loan forbearance programs and extended unemployment benefits. 

Further, credit card companies and other creditors have been more understanding with customers due to the grave health consequences of Covid-19 and its effect on households and workplaces.

Now is a perfect time to check your FICO score and see where you stand. It might be higher than you think.

Your bank may even offer a credit monitoring service so you can see how your score may have changed recently — and a credit modeling service that can tell you how your score might improve given certain behaviors (paying off a credit card, etc.)

Steps to obtain a higher credit score

Credit scores are constantly in flux. Just because you may have missed a few credit card payments (or worse) several years ago does not mean that your credit is beyond repair.

Some of these tips might be obvious, but others perhaps not so much. Here’s a look at some small steps you can take to improve a credit score and accelerate the process of getting a loan with better terms:

  • Correct errors on your credit report. In fact, the Federal Trade Commission encourages you to do this. An error on one or more of your reports might be artificially lowering your credit score, preventing you from getting the loan you need. Errors might include negative items that should have “aged off” of your credit report, clerical/database errors or even identity theft (someone taking out a credit card in your name and using it).

  • Call up your existing credit card issuers and ask to extend your credit limits if possible. This not only can give you additional capital if you need it, but it immediately lowers your credit utilization (the percent of available credit that you actually use), increasing your credit score in the process.

  • Pay bills on time, even if it is not the minimum amount. Call up the bank or lender and let them know that a forthcoming payment will not be the minimum and make arrangements if possible. Late payments can stay on a credit report for seven years.

  • Limit the number of new hard credit inquiries on your report. These stay on a credit report for two years. As a workaround, ask if the lender can do a soft inquiry to see if you are eligible for a loan.

Note that the biggest step you can take to improve your credit score is to simply pay off all of your credit card balances and loans at once. Obviously, this is not feasible for many, especially small business owners who have been struggling for over a year.

Further, even if you could pay off everything at once, it would be unwise to tie up all of your cash at once.

Related: How to Raise Your Credit Score by 100 Points in 5 Months

Small business lenders require a personal credit score because they want to see how you manage debt, which is not such a bad thing. 

If you are in control of your personal credit, you are in control of your business credit. Your business will benefit from the actions you take to present the strongest snapshot of your personal finances.

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