How Can Entrepreneurs Overcome Credit Score Challenges When Starting a Business?

Low credit scores present unique challenges when starting a business. Anything from student loan debts to prior financial constraints could hinder an entrepreneur’s ability to finance their endeavors.

Fortunately, savvy entrepreneurs have several resources at their disposal to rebuild positive credit and secure funds. Let’s examine what entrepreneurs need to overcome credit score challenges and get their businesses off the ground.

What Is Good Credit for Entrepreneurs?

Business and personal credit scores differ but are both essential when launching a startup. If you do not have a business credit score, your personal credit history must be strong enough to qualify for a small business loan.

Personal credit score ratings range from 300 to 850 — most lenders require at least 600 for personal loans. Conversely, business credit scores range from 0 to 100, with a minimum score of 75 for a loan.

Boosting your credit scores can take up to two years, requiring ample patience. However, time and effort are necessary as banks, lenders, vendors and the U.S. Small Business Administration (SBA) heavily rely on credit and FICO scores for issuing lines of credit.

4 Tips to Overcome Credit Score Challenges

Moving past your credit score challenges takes work, but it is possible. The following four tips will help you increase your credit score and obtain financing for your business.

Entrepreneurs can obtain a free copy of their credit report from Equifax, Experian and TransUnion once annually by submitting a request form through AnnualCreditReport.com. You can also monitor changes to your credit report regularly online.

Check your credit report carefully, looking for an incorrect name or address, inaccurate payment dates and balance errors. If there are oversights in your credit report, contact one of the three credit bureaus to dispute it.

Your best chance at improving your credit score is to reduce your debts. Start paying off the highest-interest debts first. As your debts decrease, your credit score will go up.

It might be helpful to consolidate your high-interest debts — including school loans, auto payments and credit cards — into one.

Entrepreneurs have several ways to consolidate their debts. Two possibilities are taking out a personal loan or a home equity line of credit. Otherwise, applying for a balance transfer card with a 0% introductory APR for 12–18 months is another option. However, these cards typically charge a 3% to 5% higher interest rate after the introductory period.

Increasing the limit on your credit cards is not an opportunity to spend to your heart’s content — but it can help if you are trying to improve your credit score.

Raising your credit limit is one way to prevent yourself from going over with larger purchases. It also helps you cover emergency expenses and earn better rewards.

You can call the customer service number on the back of your credit card or log into your online banking account to request a limit increase. Typically, you must disclose your current income to raise the limit.

Suppose you don’t have any credit to your name or are trying to correct bad credit — a credit-builder loan is an excellent way to put yourself on a lender’s radar.

Approved credit-builder borrowers pay up to the borrowed amount in a bank account. Payments get reported to the three primary credit bureaus, improving your credit score.

Unlike typical loans, borrowers receive the entire loan amount after paying it off. However, it is critical to keep up with payments as it demonstrates to lenders you can repay loans fully.

Other Ways to Finance Your Startup Business

Entrepreneurs should not allow their credit score challenges to hold them back from successfully starting a business. These five techniques can help you obtain funds as you boost your credit score.

Crowdfunding is one of the more popular modern financing techniques for small businesses. For example, Uber raised over $1 billion from crowdfunding events to launch what’s become one of the most popular ride-on-demand platforms in the U.S.

Once you’ve decided crowdfunding is right for your prospective business, select an online platform and create a campaign page. Then, decide on a timeline and the amount you need to raise for startup success.

A business partner with reputable credit can help you get a loan by cosigning. Cosigners assume responsibility for the loan if you miss a payment or pay late.

There are risks to seeking a cosigner on your business loan, especially since they must bring their personal finances into the mix. Will you be able to keep up with payments? How will such a decision affect your relationship with your cosigner?

Always resort to a cosigner last and ensure you have a steady cash flow coming in to avoid burning bridges.

You can apply for a microloan if you are starting a business with credit score challenges. Typically, non-profits issue microloans.

Other microlenders are affiliated with the SBA microloan program and may be willing to work with you. Often, microlenders issue loans to individuals starting businesses in underserved areas.

As the name suggests, entrepreneurs can expect a smaller amount with a microloan — far less than you may need for your business endeavor.

The SBA offers 7(a) loans to individuals who do not have the preferred credit score for a traditional loan. Borrowers may receive up to $5 million on a 7(a) SBA loan, which is repaid monthly with interest from the business’s revenue.

Entrepreneurs can use the SBA loan to purchase commercial property, repay current debts, purchase equipment and supplies, or provide temporary or long-term revenue.

This form of financing has been around for a short time but may be an option for eager small business owners. Peer-to-peer (P2P) lending removes lenders and financial institutions from the mix and allows you to borrow from investors directly.

Borrowers and investors open an account on a P2P lending platform, which handles the rates, conditions and transactions. Investors decide on an amount they want to distribute across several loans.

While there are benefits to P2P lending, borrowers must contend with higher fees and interest rates, and investors assume a much greater risk of default.

Follow Your Entrepreneurial Spirit With Better Credit

Whether establishing a small business or not, working through your credit score challenges is essential. Your credit score might determine several life milestones — from affording a house to purchasing a car — as many people have to take out loans for these big-ticket items.

Qualifying for a loan can make or break your abilities as a future small business owner. Start securing good credit and financing for your business venture today.

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Eleanor is editor of Designerly Magazine. Eleanor was the creative director and occasional blog writer at a prominent digital marketing agency before becoming her own boss in 2018. She lives in Philadelphia with her husband and dog, Bear.

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