Access to credit is a key component to running a successful business, but oftentimes business owners don’t think about it until they experience a cash crunch. That’s unfortunate because the key to becoming eligible for more credit lies in the planning. And if you run a small business, taking some steps now could make the difference in whether you survive a cash crunch or are able to grow your business. In fact, The New York Federal Reserve did a study that shows mid-sized businesses are granted credit 60 percent of the time, while micro-businesses (those with profits under $250,000) are granted credit only 25 percent of the time. That makes it important to take some steps before you ever apply for a loan to increase your chances of being eligible for more credit. Here are four steps you can take right now.
Build a Good Credit History
The first thing lenders look at when considering you for a loan is your credit history. And many business owners are surprised to learn that both their personal and business credit comes under scrutiny. Before you apply for a loan, get copies of both credit histories and make sure there aren’t any errors on them. The Federal Trade Commission says 5 percent of people have errors on their reports, and if you do, it will hamper your ability to get a larger amount of credit. Here are the target scores for both reports:
- Personal Credit Score. These scores range from 300 to 850, and the higher your score is, the better your chances of getting credit. Thirty-five percent of your score is based on your payment history, thirty percent on the amount of your credit card debt, fifteen percent on the length of time you’ve had credit (the longer the better), ten percent on new credit obtained and ten percent on credit mix (types of credit).
- Business Credit Score. Credit scores on your business history range from 0 to 100, and tell potential lenders how likely you are to repay a loan. You should check your business credit score with the business credit bureaus just like you would with your personal credit.
Of course, the best way to build your credit scores so is to pay your bills on time and partner with companies that report your on-time payments to the credit bureaus.
Pay Down Your Credit Cards
Lenders look at the balances on your credit cards, and if you’re overextended, they may conclude that you’re in over your head and refuse to lend you any money. Before you apply for a loan, pay down as much of your credit card balances as you can.
Show a Positive Cash Flow
When considering a loan, lenders want to know that your daily operations generate enough cash flow to repay the loan. If you can apply for a loan when your cash flow is positive, it will increase your chances of getting it. Increase yours by paying off debt, collecting receivables, reducing inventory, and increasing revenues.
Lenders will be more likely to extend you credit if you offer to put up collateral to secure the loan because it reduces their risk. Forms of collateral that you can use are real property, inventory, accounts receivable, and equipment.
Taking the steps listed above before you apply for credit may ensure that you’re eligible for a larger loan or line of credit. And that’s just good for business.