Finding access to capital to fuel business growth or fund ongoing initiatives is a challenge for many business owners.
Avoid making one or more of these simple mistakes when finding capital:
Mistake #1: Use your personal credit to pay business expenses
It’s a big temptation, particularly if your business hasn’t established a lot of business credit yet, but it’s just not a good idea to overly rely on your personal credit for business purposes. For example, using a personal credit card doesn’t do anything to help you build a strong business credit profile that can help unlock additional credit options in the future, and might in some cases even hurt your personal credit score—which many lenders still weigh heavily when evaluating your business loan application. 30 percent of your personal credit score is determined by the amount of credit you have available vs. the amount of credit you use, and even if you pay the balance off every time a payment is due, maintaining the higher balances often associated with business expenses will pull your personal credit score down.
Mistake #2: Ignore potential credit relationships with suppliers
One of the easiest ways to build a good credit profile is to create credit relationships with your suppliers. This is particularly true for young businesses that may not be able to go into the bank and borrow $100,000, but their suppliers will often offer 30- or 60-day payment terms. And, if they report your good credit history to the business credit bureaus, it helps build a strong business credit profile. Whether or not they report your credit history is important because if they don’t, you might be building a great credit history with that particular supplier, but you aren’t building a strong business credit profile.
Mistake #3: Apply for too much credit all at once
It takes time to build a strong business credit profile; don’t try to do it all at once. Applying for multiple credit accounts at the same time can be a red flag to potential lenders. A better approach is to apply for and use the credit you need and make timely payments to establish a good history. Then, when you need additional credit, because you’ve established a track record of responsible credit usage, a lender will be more likely to approve your next loan or application for credit. A slow and steady approach will win this race.
Mistake #4: Avoid credit altogether
Establishing a credit history makes sense for most business owners. Avoiding credit altogether actually hurts your chances of securing a small business loan should the need arise down the road. Using a business credit card, or other credit accounts, and regularly making timely payments demonstrates to a lender that you can manage business debt responsibly. If a loan officer can’t see that in your past credit history, he or she will be less likely to approve your small business loan.
Mistake #5: Pay your bills late
It doesn’t really matter if it’s a supplier, a business credit card, or other business credit account, making late or incomplete payments is the fastest way to wreak havoc on your credit profile. Conversely, the single biggest thing you can do to build a great profile is to make timely payments on all your business credit accounts.
Mistake #6: Ignore your business credit profile
Although it’s last on the list, getting familiar with your business credit profile is the first thing you should do. It’s not uncommon for simple errors, like mis-classifying your business, to make it harder for you to get a small business loan. Fortunately, the credit bureaus want accurate data and will correct any verifiable errors. It should be a regular practice to monitor your profiles at the three major business credit-reporting agencies (Dun & Bradstreet, Equifax, and Experian) to make sure that none of them contain any mistakes.
Avoiding these six common mistakes won’t guarantee a loan approval, but it should improve the odds of a successful loan application next time you need a small business loan.