Got the Entrepreneurial Spirit? Fix Your Credit Before Planning for New Business Venture

Many Americans are now starting to feel as though their prospects for running their own company have never been better, and as a consequence are now putting together business plans and doing all they can to realize their dreams. However, before they do so, it may be vital that they take the time to evaluate their credit scores and see where they stand.

The unfortunate fact for a large number of people who may want to start applying for small business loans is that many banks are still being a little tight with their restrictions on this type of lending, and as a consequence it may behoove hopeful entrepreneurs to do some routine things that can help to repair credit as a means of boosting their chances of being approved. That, in turn, will give them a better chance for starting this companies off on the right foot.

What are the most common credit fixes needed?
Two factors alone make up 65 percent of a borrower's scores, and as a consequence, those who want to significantly improve their credit ratings should take the time to address this often troublesome pair as soon as possible.

The first of these is perhaps the most common credit problem many face in their everyday lives: Payment history. The ability of borrowers to stay current on every one of their outstanding credit balances comprises a full 35 percent of any credit score, because lenders see it as the most predictive factor when it comes to whether a borrower will be able to pay on time and in full in the future as well. And unfortunately for many borrowers who have slipped up once or twice in the past, even a minor mistake, such as missing a deadline by a single day, can do massive amounts of damage to this aspect of one's scores, undoing months or even years of on-time payments.

Any borrowers who have missed deadlines in the recent past should therefore try to make up the ground lost as a result by making several months or more worth of on-time payments into every one of their accounts. This will help to smooth over the credit score damage caused by the misstep, but the evidence of the slip-up will linger on their credit reports themselves for years. However, the longer borrowers go after such an incident without making another such mistake; the more likely lenders will be to recognize it for what it was: A one-time occurrence that will not be repeated.

The other major credit score factor banks will consider when looking at small business loan applicants, making up another 30 percent of scores, relates to the amount of debt they carry versus the total limits allowed on their various cards. Though the common misconception is that lenders want borrowers to owe as much as possible, the opposite is true: The less outstanding debt a borrower has, the better. In fact, the amount of debt — when taken as a percentage of total limits — borrowers should have when they want to max out this portion of their score is just 30 percent or less. Any more than that, and this score factor will begin to decline on a sliding scale.

As such, borrowers trying to improve their chances for approval on a small business loan and carrying a large credit card debt load should do all they can to slash their balances as quickly as possible, and one of the best methods for doing so is to simply start making more considerable monthly payments into their balances every month. This will help to more quickly reduce their balances toward that 30 percent threshold and significantly improve their scores.

What other tips are there?
One thing that many borrowers do in an attempt to improve their scores but which can actually do more damage is closing out their credit card accounts after reducing the balances on them to zero. This is because it will reduce the total amount they are allowed to borrow and consequently boost their credit utilization ratio higher. It will also potentially lower the average amount of time they've had all of their accounts, which is a factor that makes up another 15 percent of their scores. Therefore, it is wise for consumers who have no plans of using one of their credit cards after paying off its balance in full to simply put it away in a drawer rather than cancel it altogether.

Finally, hopeful small business owners should also take the time to order copies of their credit reports and determine whether there are any unfair markings taking a toll on their standings without cause. If any of these entries are discovered, working with a credit repair law firm may help to get the situation resolved.