Did you know that most small business loans applications get turned down? While many factors are involved, including applicants choosing loans that weren’t a good fit for their business or failing to include necessary documentation in the application, one of the primary factors for these rejections is insufficient business credit.
Thus, knowing how to establish business credit is one of the most important things you can do to empower your business and lay the groundwork for future success.
At its core, your business score is an algorithm that helps lenders predict whether or not you’ll repay the money they loan you. Think of it as a more sophisticated version of what you’d do if a loved one asked to borrow money from you. After hearing the request, you’d think about that person’s history with money and then decide if it would be worth the risk to loan them the money.
Your business credit includes many considerations, but 6 of the most essential are:
These factors certainly evolve over time, which is why the word “establish” is so often used in conversations about credit scores. It takes time to reveal trends and let your track record shine.
“To demonstrate that you are financially responsible, you need to develop a financial track record in good standing,” says Forbes. “Your payment history is one of the largest components of your credit score. To ensure on-time payments, set up autopay for all your accounts so the funds are directly debited each month. FICO scores are weighted more heavily by recent payments so you can ‘override’ a missed payment by developing a pattern of more recent on-time payments. Therefore, if you have a delinquent payment, pay off the balance.”
By taking the actions recommended by Forbes, such as setting up autopay and taking care of any delinquent payments, you can ensure that the data going into your credit score algorithm is of the positive variety.
It also underscores the importance of being proactive. You can’t just sit back and allow your credit score to happen behind your back. Taking an active role is critical when it comes to building the type of credit that opens doors for you.
One example of the importance of being proactive is credit report errors. Millions of Americans have incorrect information on their reports that hurts their scores. If that isn’t startling enough, many of these people aren’t doing anything about it. You can avoid a similar fate by monitoring your reports with Equifax, Experian, and TransUnion, and taking immediate action to correct any issues you may find.
As you take an active approach to your business credit, you’ll find that you have a bigger role in the process than you ever could have imagined. Each positive action you take will yield a positive result. And by establishing these good habits, you’ll lay the groundwork for a sustainably good credit score.
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