Before diving into my specific recommendations let's start with a few credit qualification basics. Before the recession hit hard, banks relied on a startup entrepreneur's personal credit score plus pledged assets to guide their lending decisions, especially for the popular Small Business Administration 7(a) loan program. Then, an acceptable credit score was in the 600s. Today, entrepreneurs will need at least 700 to get a hearty hello from bank lenders.
What can entrepreneurs do to improve their chances of receiving small business funding? Here are my recommendations.
Check out local micro-loan programs. Here's a little known secret. Many micro-lending centers around the U.S. don't rely on an entrepreneur's personal credit score to receive a first business loan. That's good news to startup entrepreneurs with poor credit histories. Even better, entrepreneurs who take out a micro-loan for as little as $500 and pay it back in a timely way can boost their personal credit score.
Keep credit card lines in place. Unfortunately a closed credit card account can be perceived as a negative event, lowering an entrepreneur's personal credit score. Closed business credit cards can also complicate employee business travel or interrupt automatic monthly payments for search advertising, software subscriptions and other valued services.
To preempt a credit card shutdown, offer to temporarily pre-pay company credit cards or preferably put up a small certificate of deposit as security. The point is to buy time until you can put another credit card line in place through a less skittish credit card provider.
Monitor customer payments. Each day entrepreneurs make important decisions that affect their own credit by what credit they offer to their customers. Traditional bank lenders look closely at the entrepreneur's receivable collection track record. Entrepreneurs who are disciplined and collect customer payments in less than 45 days are more desirable to lenders than business owners who wait over 120 days to receive customer payments.
Communicate with unpaid vendors. Entrepreneurs who can't pay a business obligation in full should call or visit the vendor to re-negotiate payment terms before the vendor sends the account to a credit-damaging collection agency.
Check personal credit reports for accuracy. Each year, individuals can receive copies of their credit report from three leading agencies through www.annualcreditreport.com. Any errors on these credit reports could lower an individual's personal credit score. Equally, small business credit information is notoriously incomplete and inaccurate. Entrepreneurs should contact small business credit bureaus such as Dun and Bradstreet to review their company's credit standing.
Re-work your business plan. Most entrepreneurs think business plans are just for planning startup activities. Not so. Borrowing opportunities will open up to business owners who can persuade lenders that they have thought through how they will apply loan proceeds to improve a company's operating and financial position.
Successful entrepreneurship is all about moving ahead of the competition in a profitable way. Sometimes entrepreneurs advance in big leaps and other times in steady but sure little steps. Now is the right time to take a few steps to improve your credit standing in order to take bigger leaps forward in the future.
Susan Schreter is a 20-year veteran of the venture finance community and entrepreneurship educator. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.