I am always quite surprised at the number of small business owners I speak to that believe they can get a small business loan easily when they have a few “not so favorable” items on their credit report. Most people are aware that banks have strict lending requirements and those individuals with bad credit are usually sure they won’t qualify. However, it’s the people with pretty good credit that still believe they can get a small business loan easily, even with a few negative marks on their credit history. Based on my experience, there are always 3 main things (on a credit report) that small business owners are shocked about when I tell them it could get their small business loan request denied. They include:
- Inquiries – Hard inquires show up on your personal credit report when creditors pull your credit for the purpose of obtaining new credit. If you have more than 1 or 2 hard inquiries on each credit bureau report in the last six months, you may get denied. Different lenders pull your credit reports from different bureaus. For example, Chase Bank may only pull from Experian for Michigan residents. Fifth Third may do the same. Therefore if you are a Michigan resident, and you go to two (sometimes three) lenders that all pull from Experian, by the time you get to the next one you may get denied because they are all pulling from the same bureau and will see that your recently applied for credit with another bank. The good news is there are “inquiry removal” services out there that can help you get your recent inquiries removed. If you’re applying for a small business loan and you have too many recent hard inquiries, an inquiry removal service may be right for you.
- A Recent Late Payment – Paying on time is the key to getting a small business loan request approved. Typically, if you have a recent late payment, it can definitely hinder your chances of getting approved for a small business loan — even if you have been making timely payments on your accounts for a considerable amount of time. Banks are very strict about who they lend to, especially when it comes to small business, (because the failure rate is so high). They have to be sure they are lending to someone who can make payments on time, all of the time. Luckily for you, the Fair Issac Corporation, banks, and the Consumer Financial Protection Bureau recently decided that unpaid accounts that have been rectified will not be held against loan applicants when calculating their credit score. You may now have a chance to get your small business loan request approved if you have been denied due to late payments in the past.
- A Credit Card with a High Balance – Most people have no idea that banks and lenders view credit cards as being maxed out once 30% of the available limit has been used. That’s right, if you have a credit card and you have used 30% of the available balance, it is now maxed out in a lenders eyes and if you apply for a new credit card, you will most likely be denied because of the high credit card balance. It’s critical to pay your personal credit cards down below 30% of the available limit before applying for a new credit card, especially if you are applying for an unsecured business line of credit. These are not small business loans, but they are a popular form of small business financing so it would be wise to keep this in mind if you planning on applying for capital with a bank.