Is your credit score holding you back from getting a business loan?
When you apply for business finance, you want to show funders you’re willing—and able—to repay the loan. And they check your credit score, along with other financial information, to determine your risk.
But there’s more to the story when it comes to credit scores and business loans.
In this article, Lulalend’s team of credit risk experts share practical strategies for improving your credit rating right away.
Plus, you’ll learn how to get a business loan, even if you’re a relatively young business with a limited credit history.
- To improve your score, pay your accounts on time and don’t apply for too much credit at once
- Avoid defaults on your account; make payment arrangements with lenders instead
- Fintech funders use alternative data, in addition to looking at credit scores
- Review your rating periodically: you get one free credit report each year
What is a credit score?
Your credit score is a three-digit number that represents your creditworthiness. Lenders use this figure to predict your ability to repay your loan.
As a rule, higher scores mean lower risk.
Your personal credit score is unique to you and is influenced by a few factors, including:
- Your current debt
- Your payment history
- Length of payment history
Of these, paying your debt on time is one of the best things you do to build a strong personal credit rating, said Taryn Crouster, Senior Credit Analyst at Lulalend.
Based on these factors, you will be assigned a score by the credit bureaus.
What’s a good credit score for a business loan?
For business loans, lenders evaluate both your personal and business credit profiles.
Even though your personal credit score is only one of several factors lenders consider, a poor personal credit rating might hurt your business loan application.
(In our business loan guide, we dig into deeper detail about personal and business creditworthiness.)
Each bureau has a different way of calculating your credit score, but here’s a general guide to personal credit ratings:
- 700+: the best rating you can achieve
- 660+: a good credit rating
- 620 to 659: you might struggle to get a business loan
- Below 620: most lenders will see this kind of score as high-risk
For a long time, your credit score could mean the difference between your business loan application being approved or rejected. Lenders wanted a track record of repayments before approving your application.
But what if you don’t have any, or a limited, credit history?
Garth Rossiter, Chief Risk Officer at Lulalend, said fintech funders reviewed alternative data sources.
“We assess the applicant’s ability to repay and the willingness to repay. And we use a number of data points, in addition to credit scores, to make decisions.”
Tips for improving your credit score when you apply for a business loan
If you want to give yourself the best shot at building a positive credit rating, try these practical tips.
You should always aim to make your payments on time, consistently.
But what if you’ve hit a particularly rough patch?
Maybe it’s a seasonal slump. Perhaps your business is struggling because of unexpected threats in the global economy.
At some stage, most SME owners have experienced these kinds of challenges. Those are difficult, stressful situations And it’s tempting to take cover until the storm passes. But late or missed payments will work against you, said Crouster.
However, a proactive approach makes all the difference.
“If you’re in a situation where you can’t make your payments, let the creditor know beforehand. You’ll be able to make an arrangement, which is far better than a default listing on your credit report.”
Unpaid taxes will drag your credit score down, explained Lindiswa Tyhali, Senior Credit Analyst at Lulalend.
And trying to dodge the South African Revenue Service (Sars) could end up damaging your financial profile.
For instance, SARS could issue a court judgement against your name. Once that happens, it’s public information that shows up on your credit profile for years.
Business owners pay a provisional tax twice a year. Here’s an article with tips to save money and time when paying your tax.
Avoid bad debt
Paying off debt establishes a positive credit history. So, some debt is necessary. But there are types of debt to avoid.
Tyhali said short-term loans that fall under the National Loan Register (NLR) are considered bad debt, because they indicate to lenders that you might be having cash flow issues.
Limit credit applications
Each time you apply for credit, you’re giving the lender permission to pull your credit report.
These inquiries stay on your profile. Beyond that, each query reduces your credit score by a single point.
Don’t open too many new accounts
Racking up large amounts of credit quickly is a red flag, said Crouster:
“Taking too much debt over a short period of time might be a sign you’re struggling financially.”
How to get your free credit score
Are you ready to improve your credit score?
If you haven’t already checked your credit rating this year, that’s a great place to start.
You get one free credit report per year.
Here are popular credit bureaus :
If you’re after fast, easy business funding, consider a fintech funder like Lulalend. We base our credit decisions on the real-time performance of your business, instead of relying mainly on credit scores.