By Stephen Sheinbaum
Nobody’s perfect. But some people would have you believe that your credit history must be perfect to be a small business owner.
I couldn’t disagree more. A poor personal credit score is only one measure of an individual. It offers some insight into how that person has managed credit in the past but, too often, it fails to paint a complete picture. A credit score which has fallen because of debt incurred in a medical emergency is different, to me, than a low credit score that happened because a person made a conscious decision to not repay a debt.
The good news for small business owners is that lenders now have many more ways to understand a person’s creditworthiness, which translates into more options to find funding to grow a small business.
Personal credit scores are compiled by three major credit reporting bureaus– Equifax, Experian and TransUnion–from information they get on how you pay for the things you buy and the debts you incur. A bad credit score (which is a score of 620 or less) has made it more challenging for people to rent an apartment, buy a car or a house, and even get a job.
Now, however, some financial services companies are moving beyond credit scores. Whether these scores are good or bad, they simply don’t tell us everything we need to know about a person’s willingness to repay funding, which is a far different thing than their ability to repay.
There can be times when a person’s credit score does not properly reflect their creditworthiness. If a credit card issuer cuts your credit limit, your score will drop, even if you’ve regularly paid your card bill on time in the past. Sometimes, a small business owner is so busy running their business that he or she forgets to pay personal bills. My business, Bizfi, has had clients with health issues in their family that have forced them to delay paying certain bills, damaging their score.
A bad credit score can be improved and it no longer has to hold back the growth of your business. The first step is to make sure there are no errors in your score. Once a year, you can contact one of the credit bureaus to receive a free copy of your credit report. If you find an error, write a letter to the credit bureau about what was wrong and include copies of documents that support what you are saying. (The U.S. Federal Trade Commission has a good sample letter here.) The credit agency has 30 days to investigate your claim. If it agrees with you, it will contact whoever made the mistake and fix your file. If it doesn’t, you can have a “statement of dispute” added to your file and sent to anyone who does a credit check on you.
If unpaid debts have damaged your score, you’ll need to pay them to improve it. Before the debts go into collection, contact your creditors to work out a repayment plan. First though, you should take a hard look at your budget and cash flow to make sure you can meet the terms of the repayment plan. If there’s a bankruptcy in your past, you should know nobody can make it instantly disappear from your credit report; bankruptcies will remain on the report for 10 years. Many other kinds of negative information stay on a report for seven years or more. Criminal convictions stay in your file forever, as do any reports that you have applied for more than $150,000 of credit or life insurance. And forget what you’ve heard about so-called credit privacy numbers: No one can legally give you a new credit identity. You also can’t “piggyback” on someone with good credit. You have to fix your own bad credit to move on.
Having a bad credit score doesn’t mean you can’t get funding for your business. Now, in addition to banks, there are alternative finance companies with other options. While many of these companies have highly automated processes for approving and funding applications, your best bet, if you have bad credit, is an alternative finance company that has an underwriter that you can talk to. This gives you a chance to explain the mistakes that you have made in the past and, more importantly, talk about how you are managing your personal and business finances now to avoid a repeat.
One final step: Start building a credit score just for your business. Get a free D-U-N-S number through Dun & Bradstreet and then make sure you pay your suppliers promptly. The new credit score that you are building for your business can be your chance to correct the mistakes of the past.
Stephen Sheinbaum is the founder of Bizfi, an aggregation marketplace that offers many kinds of alternative funding, from short-term finance to longer term loans, equipment finance and lines of credit. Since 2005, Bizfi has originated in excess of $1.7 billion in funding to more than 30,000 small businesses.