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The Role Credit Plays in Small Business Loans

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Believe it or not, your personal credit score is one of the most important parts of the small business loan application. The way lenders see it is that they are lending money to the small business OWNER, so they want to ensure that you’ve got a strong history of acting wisely when someone has given you “credit.” The better your credit score, the better your chances of your securing an affordable small business loan.

A great thing to do before you apply for a small business loan is to pull your own credit report and check your credit score. You can do so for free at annualcreditreport.com. Be wary of any other site that makes you pay! By pulling your credit report, you now know exactly what lenders will be looking at.

Analyzing Your Credit

The first thing you need to do is check your report for errors. There could be things on your report that aren’t correct or even applicable to you that are bringing down your score. This could be things like:

  • Erroneous accounts or credit lines you never opened
  • Erroneous judgments or collections
  • Accounts, judgments or collections that were satisfied but are still showing as outstanding
  • Judgments or collections you never knew about

To get this information removed, you need to first verify that the information is in fact erroneous. If it’s a collections matter, you could start by tracking down the collection agency and asking them to let the credit bureaus know you’ve satisfied the debt. Or, if it is an unknown outstanding debt, pay it off and then ask the agency to contact the bureaus. For other matters, contact the credit bureaus directly. Send a dispute letter along with the supporting documents needed to verify the claim. The credit bureaus are obligated to investigate these matters and will usually get back to you with a result in around 30 days.

If you don’t find errors on your report, but you think you can stand to improve your credit history, try to identify the areas where it needs the most work.

As you can see, your payment history has the biggest impact on your FICO score. The best place to start improving your score is to make sure you’re paying all your bills on time!

If you’re curious what credit score you need to apply for a loan, that’s a tough one to answer. For online lenders, you’re going to want to have credit score over 550, but you will receive better offers if your credit score is higher, say over 620 or preferably 640. If you think you can improve your score, it may be worth it to take the steps to do so and wait a few months before applying.