The first broad-based credit scoring system, known as the FICO score, was introduced in 1989, over 30 years ago. This rating system has since played a significant role in evaluating borrower risk. However, as economic conditions tighten and downturns have become more frequent, the scrutiny on personal credit scores for business lending purposes is higher than ever.

Credit scores are integral for evaluating a borrower’s ability to repay. As a small business owner, acquiring financing for your business comes with its own unique challenges. Your personal and business credit profiles will each play a role in establishing your loan’s terms and how much you can borrow.

Applying for any loan with a poor credit score makes the loan application process even more of a challenge while borrowing costs are typically high. If you have weak credit, it’s important to conduct a self-assessment to determine how you got there.

Understanding why you have a low FICO score in the first place provides a reliable starting point for improving it. This article covers the basics of small business financing for bad credit before touching on a few reliable strategies that will help turn a weak business credit profile around. Following these simple tips will ensure you can attain more favorable loan terms in the future.

Your personal FICO score and small business financing for bad credit

How do FICO scores work, and what role do the reporting agencies play in your ability to acquire business financing? The three major credit reporting agencies, Experian, Equifax, and Transunion, all use the standardized FICO score to provide a framework and reference point for your personal creditworthiness.

Each bureau has a slightly different approach for calculating your credit score, and it’s not uncommon to see all three display different results. It’s up to the individual lender concerning which reporting agencies they prefer to emphasize for the loan approval process. Most often, potential creditors will use the middle score of the three -but not always.

How do I know if my credit is bad?

The first step to understanding where you’re at with your credit is to request a free copy of your credit report from all three bureaus. In response to online businesses charging egregious fees for credit reports in the early 2000s, a federal law enacted in 2003 granted consumers the right to a free annual credit report from all three reporting agencies.

Before visiting with any creditor to discuss additional funding for your business, request a free copy of your credit report from all three bureaus. FICO scores can range anywhere from 300 to 850, although it’s rare to find scores at the extreme ends of this spectrum.

From a risk perspective, scores below 500 are considered bad credit. However, most banks regard scores below 680 as poor, while some may even shy away from FICO scores below 720 and consider borrowers in this range as “subprime.”

Your payment history accounts for 35 percent of your credit score calculation. The bureaus also look at other factors, like the age of your open trade lines and the balances you keep on them. There’s even some speculation about whether changing addresses and jobs frequently could indirectly influence credit scores downward.

One late payment can decrease all three credit scores substantially. Expect slow-pays over 90 days, rolling lates, or accounts sent to collections to drop your rating by 100 points or more. Of course, the best way to maintain a stellar credit profile is to always pay your bills on time.

However, the reporting agencies like to see that you’re actively using credit responsibly. In other words, having no credit or maintaining open trade lines while not using them could hamper your ability to attain favorable borrowing terms.

As a rule of thumb, you should never exceed 25 percent of any revolving trade’s maximum limit. Paying those balances down in full before the due date every month is equally crucial.

If you need to boost your credit, it is advisable to use an unsecured credit card instead of a debit card to purchase some of your basic necessities. As long as you pay this balance in full every month before the due date and never exceed 25 percent of the card’s maximum limit, this strategy should stimulate your score in a positive direction rather quickly.

Applying for small business loans with poor credit

While reestablishing a positive credit rating might take some time, lenders understand that unexpected shortfalls can happen. If you don’t have A credit, don’t exclude the possibility that you might still find yourself approved for small business financing.

While your personal credit profile will likely play a role in small business financing for bad credit, there exists a parallel system of business credit ratings. Lenders must also take this score into account upon evaluating your profile. Nearly half of all small business owners don’t know they have a business credit score, and an even greater percentage don’t understand how to interpret it.

The most frequently used business credit ratings come from Equifax, Experian, and a company that deals exclusively in business credit reporting called Dun & Bradstreet. This credit ratings system doesn’t rely on standardized FICO scores. Each bureau has its own proprietary scoring engine, and you’ll need to pay to gain access to these reports.

Contesting inaccurate information on both your consumer and business credit reports is possible. Removing errantly reported trade lines and collections accounts can raise your scores substantially. Making timely payments to your suppliers, opening a business bank account, and establishing a business line of credit can all boost your business credit score.

The outlook for business loans and bad credit

There is plenty of opportunity for bad credit business loans, especially in the government and alternative lending spaces. If your credit scores are low, however, you can expect higher borrowing costs and insurance premiums.

It’s important to remember that a poor credit profile won’t automatically disqualify you from attaining the financing you need to provide additional support for your business. Moreover, remaining active within the lending system is the only way to get your credit back on track.

You’ll need access to working capital to grow your business and increase profits. The small business financing specialists at New Bridge Merchant Capital can help.

Reach out to the team of business financing specialists a New Bridge Merchant Capital now, and consider partnering with us over the long term. We can help improve your business credit rating immediately. We’ll put you on track to start enjoying the benefits of a strong credit profile in no time.