For small businesses, personal credit scores are crucial for securing loans and financing options. They are an indicator of one’s ability to perform and pay debts reliably. “I think of it as a reference on a business owner’s character,” said Raj Tulshan, founder and managing member of Loan Mantra, a facilitator of business loans for small and medium-sized businesses. 

There are two kinds of credit: the business score and the personal score. 

A personal score, Tulshan explained, is based on an individual’s financial history and includes factors like personal loans, credit card usage and mortgage payments. A business score assesses a company’s creditworthiness by considering its payment history with vendors, business loans and lines of credit. “Mostly in the commercial space, in the small business environment, lenders deal with the personal credit score,” Tulshan said.

The personal credit score ranges from 300 to 850. The higher your credit score, the more apt lenders will be to approve your application. “One of my best analogies is that a credit score is like the SAT for college,” Tulshan said. “The SAT score indicates your capability to perform and achieve. Similarly, a credit score reflects your ability to manage and repay debt. If you have a credit score of 680 or above, you’re likely to perform well and pay your debts more reliably than someone with a lower score.” 

It used to be that a credit score was “a limited data point in a whole spectrum of things that people considered,” Tulshan said. But after the financial crisis — where creditworthiness became a critical concern — credit scores “really took center stage,” he added.

Before applying for a loan, small business owners need to make sure their credit score is in good shape. Some of the key factors that influence a credit score include the ability to pay bills on time, credit history and utilization of credit. 

If you’re not where you want to be with your personal credit score, Tulshan offered the following advice:

Set up automatic payments.

Timely payments are crucial for establishing good credit. As a small business owner juggling many tasks, remembering bill due dates can be challenging. Automatic payments can help with this.  

“If you think: ‘Oh my god, I don’t know what my financial status will be [on that date],’” Tulshan said, “there’s good news.” Every institution has an electronic funds-transfer system that facilitates payments in the U.S. and internationally where you can set up for a minimum payment, he said.

For example, credit-card statements often show both the total balance and the minimum payment due, such as a $100 balance with a $10 minimum payment. If you set an automatic payment up for the minimum amount, you have the security of not overdrawing and “you’re never late on making your payment,” he said. 

Keep credit use low.

“If you use more than 35% of your available credit limit, your credit score tends to go down,” Tulshan said.  “When you pay down the balance, it goes back up.” One effective way to manage this is by distributing expenses across multiple credit cards to avoid high balances on any single account. “The best thing I can recommend is to distribute your expenses between two or three credit cards if you have them,” Tulshan advised. 

Lower-credit use signals to lenders that your business is not overly reliant on borrowed funds, reducing perceived risk and improving your chances of securing favorable loan terms, Tulshan added.  

Keep separate business and personal credit cards.

Mixing personal and business expenses can negatively impact both personal and business credit scores, Tulshan said. A high balance on a personal credit card due to business expenses can lower personal credit scores, making it harder to secure personal loans. Conversely, maintaining a business credit card allows the business to build its own credit history and score, which is essential for securing business loans and financing.

Maintain a mix of credit types. 

Having a good mix of credit (e.g., credit cards, mortgage, auto loans) can positively impact a credit score, Tulshan said. Lenders evaluate an applicant’s risk by assessing credit diversity and looking for a well-rounded credit profile that shows an ability to manage various financial obligations. According to Tulshan, borrowers should “have a card or a trade line for your business — like a working capital or line of credit, which most financial institutions provide.” And as mentioned above, borrowers should “try not to use personal credit toward business and vice versa,” he said. 

Limit credit applications.

Borrowers should be selective about when and why they apply for credit. Each application typically results in a hard inquiry on a borrower’s credit report that can slightly lower the score, Tulshan said.  Too many inquiries in a short period can suggest financial instability so apply only when necessary and after thorough consideration. “You don’t want to lose points for no reason,” Tulshan said.

Monitor your credit report.

By keeping a close eye on your credit report, you can quickly identify and address any errors or inaccuracies that may be negatively impacting your score, Tulshan said. This proactive approach can significantly improve your credit rating by allowing you to dispute incorrect information, such as erroneous late payments or accounts that do not belong to you.. Additionally, monitoring your credit report helps you stay informed about your overall credit health and helps detect any signs of fraudulent activity early on. “Every small business owner should do a check every six months to one year, just for a sanity check,” Tulshan advised. “It only takes a minute.”

Address negative remarks on your credit report.

If you see a negative remark on your credit report, don’t panic. “Just follow through on it,” Tulshan said. “One of the best things I tell small business owners is, just because someone says you’re late, doesn’t mean you’re late. If you believe your credit was wrongly dinged, go back and make that call.” This means borrowers should first contact their service provider with proof that a payment was made. If it wasn’t made, pay the outstanding amount, and the vendor will update the system accordingly. 

Ask the vendor for a letter confirming the correction, and then reach out to the credit agencies. When you pull your credit report, the last page will typically have instructions for disputing discrepancies. “Agencies give you the option to call them, email them or send them a letter,” Tulshan explained. 

“There’s an ecosystem built around fixing errors, so it’s not a lost cause,” Tulshan said. “There’s always room to work around it.” 

Consider the timing of your application.

If a borrower is aware of a genuine issue affecting their credit, they should wait to apply for a loan or financing. “Look, things happen. Someone gets sick and you miss a mortgage payment,” Tulshan said. There are consequences, though. For instance, if a borrower misses their April payment, their score may drop by 30 to 40 points in May. If the provider is willing to work with the borrower to address the missed payment, wait another few months before applying for a loan, Tulshan said. “As time progresses from the point of error, your score tends to improve. It takes two to three months,” Tulshan said. “Generally, people see a small bounce in the first two months, and if things remain consistent, by three to four months you’re probably back on track.”

Be honest with lenders.

When talking to a lending institution, be transparent about why your payment was late. “For example, say, ‘Hey, I was out of the country,’ or ‘My mother passed away,’” Tulshan suggested. “We are all human beings,” he added. “The financial institution you’re working with also has a human being on the other side. They’ll understand and take your history into account.” 

Remember, Tulshan said, “As a business owner, credit is God. Credit is one of the most important things you will need to grow your business.” By following these strategies, you can effectively manage your credit scores, enhancing financial health and securing better loan terms.