The Credit Requirements for a Small Business Loan

Getting funding through a small business loan requires an application and a business plan. The business plan shows your company's likelihood for future profits. It is required whether you are starting a new company or seeking funding for an existing operation. This portion has nothing to do with your personal or business credit. Your application, on the other hand, will require disclosure of one or both.

Personal Credit on a Business Loan

The personal credit of a business owner will matter most at the beginning stages of a new company. The company will not yet have financial records or a credit history of its own. Instead, the owner will have to provide his or her personal verification the loan will not go into default. Since small business loans typically have higher limits than personal loans, the requirements for financing can be strict. You should have a credit score above 700 to seek a personal loan; to seek a business loan, your score should be as close to 800 as possible.  

Business Credit to Secure Financing

Once your business has been in operation for a number of years at least, it will have a record of payment and financial standing. Your business will have an independent Tax ID number, and this number will come along with a complete credit score, just how your social security number is used to track your personal debt performance. A business's record will show if it met rent or mortgage payments, equipment financing payments and tax payments. Any business credit card will also appear on this record of debt.

Building Business Credit

You can build credit for your business by taking loans out in the business's name as early as possible. The longer you allow your personal credit score to be the sole record on your business, the longer it will take for your business to stand on its own. Encourage growth of business credit by taking low risk loans in the beginning. Since the business will not have a credit history, it is unlikely to get a high limit credit card, for example. But, the business can secure a modest credit line. Using this line to make routine purchases and paying down the balance each month is a good start to building business credit.

Building Business Assets 

It is important to build assets for your business in addition to simple credit. When you first take a small business loan, you may have to use your own home equity or automobile as collateral. This exposes you to personal risk if your business fails. Wise business owners will remove personal assets from loans as soon as possible. Purchase equipment and assets for your company when you can. These assets will not only protect your personally, they will also protect your business from bankruptcy. If you rent all of your business assets, you will have nothing to liquidate if you need to cover debts in the future. Purchasing assets provides you with equity you can later turn into cash if there is any emergency, allowing you to walk away unharmed from a failed business.

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