One of the things we’ve learned through the implementation of the Paycheck Protection Program (PPP), is that your credit profile still matters in the midst of a crisis like that caused by the coronavirus. With that in mind, what can you start doing now, and post-pandemic, to build your business credit in the wake of COVID-19?
Regardless of whether you are applying for an SBA loan or any other type of small business financing, a strong business credit profile is the foundation for demonstrating your business’ creditworthiness to a potential lender. Your profile gives lenders visibility into the industry you do business in, your estimated annual sales, and how you interact with your current creditors.
Many lenders pulled back as it became clear that some of their customers would be shuttering their businesses as a result of COVID-19. Credit card limits have been reduced, as well as many lines of credit for a lot of small businesses. We experienced the same thing following the financial crisis of 2008 as banks and other financial institutions tried to circle the wagons to mitigate the risk they associated with their small business clients. This was when many online lenders entered the market to help businesses access capital they couldn’t through more traditional means like their local bank or credit union.
Fortunately, there are some things you can do to build a stronger business credit profile in the midst of these difficult times. Taking the right action today can help position your business for the future. Not only in the event there is additional financial aid from the federal government through the SBA’s loan guarantee program, but also as lenders generally come back online.
4 Tactics to Improve Your Business Credit Profile Post-COVID-19
Although there is no shortcut to improving your profile, it is possible to improve your business credit in a relatively short period of time by leveraging these proven business credit tactics.
Monitor your business credit profile. There’s a reason this is at the top of my list. It’s easy to do, can be free, and has an impact. Four years ago, Nav did some research in why so many small business owners weren’t able to achieve their American Dream. The American Dream Gap Report was the result. Although the report is a few years old, I think the findings are still relevant today—maybe even more relevant as we crawl our way out of this current economic and health crisis. Some of the key findings include:
- 45% of small business owners who are denied financing get turned down more than once and 23% don’t know why their applications were denied.
- Small business owners who understand their business credit scores are 41% more likely to be approved when they apply for a business loan.
- Those who understand their business credit profile are also 31% more likely to consider expanding their business.
- Yet, 45% of small business owners don’t know they have a business credit score and 82% don’t know how to interpret their score.
It’s hard to believe that something as simple as regularly reviewing your business credit profile could improve the odds of a small business loan by as much as 41%, but it can. It’s human nature to positively impact the things you pay the most attention to—this is also true for your business credit. A monthly review of your business credit is not too frequent.
All three of the major business credit bureaus (Experian, Equifax, and Dun & Bradstreet) offer you the ability to monitor your business credit for a small fee. You can also monitor both your business credit and your personal credit for free at Nav.
Separate business and personal credit use. A lot of small businesses owners use their personal credit to pay for business expenses. But it’s just not a good idea and could negatively impact your personal credit score. Keeping your business and personal credit, expenses, and income separate is just a good practice to get into. What’s more, many businesses experienced trouble qualifying for a PPP loan because they didn’t.
How does using personal credit for business purposes hurt your credit score? The higher balances associated with business expenses on your personal credit card, for example, pull your personal score down because part of your personal score is the ratio of available credit to the amount of credit you use. This is true even if you pay off the statement balance every month. Additionally, using your personal credit to pay for business expenses doesn’t do anything to help build a strong business credit profile.
Look for ways to establish business credit: It’s likely that credit will be tight for the foreseeable future. The hard facts include that lenders will be slow to re-enter the market as long as the financial health of small businesses is still in question. What that means is business owners will need to look at ways to access borrowed capital that might not normally be at the top of their list. Trade credit is a good example.
Although payment terms from your suppliers isn’t a small business loan, it is credit that can help you build a strong profile. If your supplier reports your good credit history to the appropriate credit bureaus, it will help you demonstrate that you are able to successfully use credit to build your business. What’s more, if your vendor offers a discount for their customers who pay their invoices early, even better. I know of more than one small business that is able to pay their modest payroll with the discount terms they derive from their vendors.
Use only the credit you need and make payments according to agreed-upon terms: There will be a temptation to borrow as much as you can every time you can right now. Just remember, that there are costs associated with borrowing regardless of where you borrow and whatever the interest rate may be. Normally I would say there are only two reasons to borrow, 1) to increase ROI and 2) to build value in your business. Right now, I’d like to add a third: to maintain viability.
Our current situation is unprecedented. That being said, ensuring your business will be able to service debt in the long term to cover the short-term needs caused by the coronavirus is incredibly important. Don’t underestimate the costs associated with borrowing right now. In fact, I’d recommend you consult with your accountant or other trusted financial advisor to make certain you understand all the costs associated with borrowing today to ensure you are in a financial position to successfully service debt.
As a small business owner, you should expect that your personal credit score will always be part of any business creditworthiness decision. It has been one way lenders have evaluated potential borrowers looking for PPP money today, it was part of every creditworthiness discussion in the pre-COVID-19 world, and will likely be part of any future business loan decisions. Don’t interpret that as a reason not to focus effort on building a strong business credit profile as well. Together, a good personal score and a strong business profile will open doors to small business financing opportunities that will not be unavailable to those who have a weak profile.
This article was originally written on May 11, 2020 and updated on February 2, 2023.
I can think of several reason to keep your PPP loan. First and foremost, it is a loan at 1%… WHAT?! That’s amazing. If you cannot get it forgiven for using it to pay employees. Pay down any other high interest credit cards, business credit lines or loans. Put it in a savings account and use it to pay itself off and build your business credit. Plus you’re building a relationship with the SBA, that can help you if you need to borrow money in the future. If you go out of business anyhow and declare bankruptcy… it’s forgiven.