Best Ways to Improve Your Business Loan Approval Chances

Asking for your first business loan? Lenders want to know more than you may think. Expect a look into your personal finances, and a close one at that.

Even when a business takes out a loan, its owner’s finances affect the decision. Owner’s income, credit history, and assets matter — even for a corporation or LLC. Usually, they’ll ask the owner to guarantee payment no matter what happens. That makes it more like a personal loan than most owners want to believe.

Your Credit History

To determine what kind of loan you can get and how much you will have to pay for it, a lender looks at your credit history. Understanding what affects your credit score can help you prepare before seeking a business loan.

Not all business lenders put the debt on your personal report, but every one of them will pull the personal report when you apply. Small businesses especially should realize that it’s a common stumbling block in getting a loan.

When many owners kick off a business, they usually rely on their own finances to fund it. Later, when the company is stable, they only start looking for a loan so they can get more capital for growth. But that has a side effect. Your personal credit can suffer because of the trouble of starting a business and the company getting back on its feet. After your personal report takes a beating, some lenders may be less interested in a business loan.

If you’d like to own a business but your credit is weak, it can complicate things. For a lot of entrepreneurs, that means putting off the start of their venture. And even if they decide to try anyway, a weak credit score can mean a smaller loan than the business really needs.

Besides the chance of being turned down outright, your credit score and your track record of payments has another influence on your loan. No matter what type of loan you get or whether the debt goes on your personal credit, the score impacts your interest rate and the cost of the loan. On a large loan, even a small increase in interest can mean huge changes in the amount you pay out.

Five Key Pieces of Data

Credit reporting agencies look at a lot of information to calculate a credit score. But there are five key pieces of data that really help determine the number.

Payment history comes first. Thirty-five percent of your score is determined by this piece. It reflects whether you’re paying your debt and if you’re doing it on time. Payment history matters because it shows lenders whether you’re responsible with the money you’re given.

To determine payment history, credit bureaus examine any account that has a credit line, also called “revolving” credit, including credit cards and lines of credit. It also includes loans with a fixed monthly payment plan, known as installment loans. Don’t forget that each delinquency is another ding to the score. That includes bankruptcies and accounts referred to collection agencies.

Not all late payments are treated equally. Whether they hurt, and how badly, depends on several factors. A few of the more important questions they’ll ask are how many days were you late, how long ago, what’s the amount, and how many late payments do you have?

Next comes how much you owe. Another 30 percent of the score is based on this category. It takes into account total debt, how many accounts have balances on them, how far loans are paid down, and what’s called “utilization.”

The “utilization” part reflects how close you are to your credit limit.

You have to carefully consider this part of your score when you launch a business. Many owners put start-up costs on their personal credit cards. Unfortunately, that means trouble. Those cards can build up large balances that don’t get paid off quickly. That hurts your utilization, and as a result your score drops.

Your length of credit history is another 15 percent of the score. The report covers the ages of your oldest and newest account, the average, and how long since accounts were used. If you’re newer to credit or don’t have a lot of accounts in your name, this part can limit you.

New credit only makes up 10 percent of your score. All else equal, creditors prefer people with older accounts in their name. The number of new accounts you open and how many creditors make inquiries are both part of your credit report, too. They can both lower your score a few points, but not if you pull your own report.

For that last 10 percent of your score, you have to think about credit mix. That’s the combination of accounts that make up the total. The report considers how many credit cards, retail cards, installment loans, and mortgages make up your credit history.

Credit bureaus like to see that you’re responsible enough to handle different kinds of credit. Some accounts are “revolving,” like credit cards or lines of credit, meaning you can carry a balance. “Installment loans,” like mortgages, are paid down every month and have a set end date when the balance hits zero.

Five Things You Can Do

But a low score can be boosted. Here are five things you can do to help you on the way.

• Pay the bills, all of them, by the due date. A payment that is 30 days late or longer hits your credit report.
• Keep the balances low or pay them off completely. That will lower your credit utilization.
• Don’t close credit accounts, especially older ones. It shortens your length of history and removes accounts that show creditors you can handle the responsibility.
• Don’t apply for a lot of credit at the same time. Inquiries made by creditors that are considering granting you credit, such as a mortgage or credit card application, can lower your score.
• Your credit report may include info that’s just plain wrong. Everyone gets one for free at annualcreditreport.com once a year. This is also how you check for errors, or whether someone has taken your information to open a new line of credit. During the pandemic, they allowed reports every week until April 20, 2022.