Applying for a small business loan may require you to hand over your personal credit reports to a lender (whether your business is a startup or existing business). Most traditional lenders will review your personal credit history and take it into consideration when deciding whether or not to approve your for a small business loan. That’s one major reason to focus on building an exceptional credit history if you plan on starting a small business.
Start up business owners are more likely to have lenders focus primarily on their personal credit history when applying for a small business loan. Damaging your personal credit history and later attempting to apply for a small business loan will quickly result in a denial. A damaged personal credit history will make it fairly difficult to obtain financing for a small business start up. Your options become very limited when you don’t have a good personal credit history as a start up business owner. Here are 3 ways you can build and maintain an exceptional credit history:
- Obtain Personal Credit Cards – Personal lines of credit or store credit cards can quickly help you build a positive credit history, if you manage them properly. I suggest starting off with small credit cards that have limits under $500. Using the credit cards for purchases that you know you’ll have the money to pay back is wise. This can be things like gas or groceries. People typically set aside funds for these expenses in their monthly budget and that can make it easier to cover what’s spent on the credit card. This will help you build credit over a relatively short period of time.
- Make Timely Payments – This is the most important aspect of building and maintaining an exceptional credit history. Timely payments account for 35% of your credit score therefore it’s important to pay on time, all the time. Lenders frown upon late payments. Recent late payments (that are less than 2 years old) can result in a denial for certain small business loan programs.
- Diversify Your Accounts – Credit cards are only one type of financing that can quickly help you build a good credit history. Installment loans like car loans can also help you build good credit. I strongly suggest diversifying your credit accounts because lenders like to see how you manage different types of debt. They want to see how well you manage long-term and short-term debts to determine whether or not to approve you for a small business loan.