Most entrepreneurs require an infusion of cash from sources other than the savings accumulated in bank accounts. Outside sources for small business funding include lenders and investors. Acquiring funding from lenders means entrepreneurs must present personal finance records to receive consideration for loans and lines of credit.
Personal credit ratings remain the most important factor in a lender’s decision to provide funding for upstart businesses. Co-founder and chief executive of MultiFunding LLC, Ami Kassar, says entrepreneurs seeking business loans must have personal credit scores at least of 650.
If your credit score falls below the 650 threshold, you need to learn how to improve your personal credit to start a business.
How to Remove Collections from Credit Report
Collections on a credit report represent the biggest obstacle for entrepreneurs to overcome in the search for business financing. However, the Fair Credit Reporting Act (FCRA) clearly states the importance of data accuracy on credit reports. In fact, disputing inaccurate collections data is the most effective way to remove collections from a credit report. If you challenge a collection account on your credit report and the credit bureau cannot validate the collection account, the credit bureau must eliminate the collection record from your credit report. Credit bureaus process billions of data entries and inevitably, a few of the data entries include false information. If you discover a collection error in your credit report, immediately file a formal dispute that abides by the credit bureau’s guidelines.
Reduce Personal Debt
Lenders consider the amount of personal debt to be a significant factor in rating your credit worthiness for starting a business. Before you apply for a loan or a line of credit to start a business, makes sure you pay off enough personal debt to make your personal finances more appealing to banks and commercial lenders. Reducing your personal debt also decreases the amount of interest you have to pay for business loans.
Credit Line Increase
Contact your personal lenders to request credit line increases. Increasing your credit line improves the credit utilization ratio, which represents the percentage of the credit limit you have used. Many credit card companies allow consumers to request for credit line increases, without making inquiries to the three major credit bureaus.
No More “Better Late Than Never”
The axiom “Better late than never” does not apply to credit. You not only need to meet every credit payment deadline, but you also must meet the deadlines days before the due dates. Late and missed payments encompass more than 30% of your credit score. The best approaches to ensure prompt credit payments include monthly reminders via text or email and automatic withdrawals from a bank account. Lenders do not open the lending spigots to entrepreneurs that demonstrate erratic personal credit payment histories.
Open Credit Accounts in Your Own Name
It is difficult to receive credit to start a business, if you have never established credit in your own name. If you want to start a business, you need to establish a few credit accounts and make sure to pay off the debts monthly. You can establish a credit history by simply placing utilities in your name.
Take advantage of the federal law that allows you to receive a free copy of your credit report one time per year. Examine your credit report to ensure you do not have any inaccurate credit blemishes that negatively impact your goal of starting a business. Moreover, if you have a credit account not listed on your credit report, take steps to get the positive credit record added to enhance your personal credit.