An excellent credit history is the one thing that will make it easier for you to obtain a small business loan for your startup or established business. With the average personal credit score being in the upper 600’s, most people may feel that it’s difficult (if not impossible) to build an excellent credit history. However, it is very doable. The key to building an excellent credit history to get approved for a small business loan is knowing what lenders expect. The checklist can serve as a guide for building an excellent credit history so you can increase your odds of getting approved for a small business loan the first time you apply
1. Diversify Your Credit History – Lenders like to see that you can manage different types of credit accounts. This includes both installment loans and revolving credit lines. Diversifying your credit history will also increase your credit score and help you build excellent credit. In fact, 10% of your credit score is based on your “credit mix” aka the types of credit accounts you have. Here are several credit accounts you can open to diversify your credit history:
a. Apply for Personal Credit Cards – At least two revolving lines of credit with total limits of $5,000 is ideal. This especially true if you plan on applying for a small business loan or unsecured business line of credit to fund your business. Personal credit cards prove to lenders that you know how to manager short term, higher interest debt over a long period of time.
b. Apply for Car and/or Mortgage Loans – At least one installment loan is ideal. Lenders want to know how well you are able to manage long term debt over a period of time. This is important when applying for small business loans.
2. Make Timely Payments – Your payment history is the most important part of building excellent credit. To make timely payments, I suggest recording your payment due dates on your calendar and setting notifications on your smartphone so you’ll never forget. Set you notifications as least 10 days in advance so you can prepare to make the payment. If you do this, you should always be able to make timely payments.
3. Keep Your Utilization Low – Your personal credit card balances should always be kept below 30% of your total available credit limits. To be sure you are not exceeding 30% of your total available credit limits I suggest calculating the maximum you can spend without going over that amount and checking your credit card balances daily. If you do go over that amount, you should pay it off before the next billing cycle. If you spend over 30% of your total available credit limits, you will see you credit score drop. It’s important to avoid this if you want excellent credit.
4. Keep Your Accounts Open – It’s perfectly fine to pay off your installment loans. However, it’s important to keep your personal credit card accounts open if you want to build excellent credit. Closing your personal credit cards may actually hurt your credit score. Even if you don’t plan on using your personal credit cards much, keeping them open, using them to pay for a few minor expense and paying the bill on time every month will help you build and maintain excellent credit.
5. Give It Time – The best way to build excellent credit is to do it over time. There’s no other way. You will need to open and utilize various credit accounts over at least 4 years to build your credit history. And always be sure to make timely payments. Late payments will always negatively affect your credit score.