Small Business Credit Repair

Navigating the financial landscape as a small business owner can be challenging, especially when it comes to managing credit. A healthy credit score is not just a number—it’s a key that unlocks opportunities for growth and stability. This article will provide insights and practical tips to help you navigate the small business credit repair process ensuring you have a strong financial foundation to support your business’s success.

Meet the Expert

Lindsay Chung

Lindsay Chung is a Program Manager at Accion Opportunity Fund and has more than 12 years of experience in the accounting and finance industry. Lindsay has worked with hundreds of small business owners across more than 20 different industries. From startups to established businesses, she has helped businesses understand their credit and ways to improve it along with advising them on how to manage their cash flow, analyze their financials, and improve their bookkeeping practices. Lindsay first realized her passion for economic empowerment while proudly serving as a Peace Corps Volunteer in Botswana. She has a Bachelor of Science in business administration, accounting and finance from the University of Colorado and currently lives in Denver.

While Accion Opportunity Fund does not provide direct small business credit repair services, we are here to help you understand, assess, and build your own credit. We can connect you with trusted partner organizations, like Mission Asset Fund, Money Management International, and TrustPlus that specialize in credit repair.

What is Credit?

Credit refers to the ability to borrow money or access goods and services with the understanding that you will repay the lender at a later date. It’s essentially a way of obtaining resources now and paying for them over time, often with interest. Think of credit as “buy now, pay later.”

When a lender provides you with funds and you repay them with interest, this process is known as extending credit. This financial tool is fundamental in both personal and business contexts, enabling individuals and businesses to make significant purchases and investments that they might not otherwise afford upfront.

Types of Credit: Personal vs. Business

There are two primary types of credit that are crucial for small business owners: personal credit and business credit. Understanding the differences and how each affects your financial health is essential.

Personal Credit

This is based on your individual financial behavior and is critical for various personal financial activities. For example:

• Buying a home: Your credit score can determine the mortgage interest rate you receive.
• Renting an apartment: Landlords often check credit scores to assess tenant reliability.
• Financing a car: A good credit score can secure better loan terms.
• Obtaining insurance: Some insurers use credit scores to help set premiums.

Business Credit

This type of credit is based on the financial behavior of your business. It’s essential for:

• Growing your business: Access to loans and credit lines can facilitate expansion.
• Buying inventory: Timely purchases to meet customer demand.
• Managing cash flow: Smoothing out the ebbs and flows of business revenue.
• Purchasing equipment: Investing in machinery or technology necessary for operations.

Both types of credit are crucial for small business owners, and managing them well can significantly impact your business’s success.

Why is Credit Important?

Credit is a cornerstone of financial health for both personal and business finances. Here’s why:

Business Credit

• Access to Financing: A strong business credit score can help you secure loans for growth, inventory, and equipment.
• Enhanced Credibility: Good credit can enhance your ability to win contracts, attract investors, and manage cash flow effectively.
• Cost Reduction: Reduces interest rates and insurance costs, thereby lowering overall business expenses.
• Operational Flexibility: Helps in renting business space and securing better terms from suppliers and lenders.

Personal Credit

• Financial Stability: Essential for large personal purchases and overall financial stability.
• Enhanced Opportunities: Helps in securing credit, renting an apartment, getting a job, lowering insurance rates, and indirectly supporting business credit.

Understanding Your Credit Report

Credit reports provide a detailed history of your financial behavior and are used by lenders to assess creditworthiness. Here’s what’s typically included in these reports:

Personal Credit Report

• Personal Information: Name, address, Social Security number, date of birth.
• Credit History: Details of your credit accounts, including balances and payment history.
• Inquiries: Records of who has pulled your credit report.
• Public Records and Collections: Information on liens, bankruptcies, judgments, and collections.

Business Credit Report

• Trade Experiences: Details of transactions with suppliers and lenders.
• Outstanding Account Balances: Current balances owed on various accounts.
• Payment History and Habits: Timeliness and reliability of payments.
• Credit Utilization: The ratio of used credit to available credit.
• Public Records: Information on liens, judgments, or bankruptcies related to your business.

To obtain your credit reports, you can request a free annual credit report from www.annualcreditreport.com or contact the credit agencies directly, including TransUnion, Equifax, and Experian for personal credit reports, and Duns & Bradstreet, Equifax, and Experian for business credit reports.

Factors Affecting Your Credit Score

Credit scores are determined by several factors, which can vary slightly between personal and business credit:

Personal Credit Score

• Payment History: Timeliness of payments is the most significant factor.
• Credit History Length: The longer your credit history, the better.
• New Credit: Frequency of credit inquiries and new credit accounts.
• Types of Credit: A mix of credit types (credit cards, mortgages, auto loans).
• Amount Owed: The total amount of debt and credit utilization ratio.

Business Credit Score

• Payment Habits: Timeliness of payments to suppliers and lenders.
• Credit Utilization: The ratio of used credit to available credit.
• Outstanding Balances: Current balances on business credit accounts.
• Number of Tradelines: The variety and number of credit accounts.
• Public Records: Any liens, judgments, or bankruptcies.
• Industry Risk: The risk level associated with your business’s industry.
• Business Size and Age: Larger and older businesses typically have more stable credit profiles.

Maintaining Good Credit

Maintaining good credit involves consistent and disciplined financial behavior. Here are some best practices:

For Personal Credit

• Always Pay on Time: Timeliness is crucial for maintaining a good credit score.
• Keep Balances Low: High credit utilization can negatively impact your score.
• Pay More Than the Minimum: If possible, pay off balances in full each month.
• Establish Multiple Tradelines: Having various credit accounts can be beneficial, but don’t overextend yourself.

For Business Credit

• Separate Personal and Business Finances: This helps protect personal assets and simplifies accounting.
• Pay on Time or Early: Timely payments are crucial for maintaining good business credit.
• Monitor Your Credit Report: Regularly check your business credit report for accuracy and to catch any issues early.
• Use Credit Wisely: Avoid taking on more credit than your business can manage.

Identifying and Repairing Credit Issues

Regularly reviewing your credit reports is vital to identifying and addressing issues. Here are some common credit issues and how to address them:

• Late Payments: Consistently paying bills and loans late can significantly damage your credit score. Make sure to set reminders or automate payments to avoid this issue.
• High Credit Utilization: Using a large percentage of available credit can be detrimental. Aim to keep your credit utilization below 30%.
• Errors on Credit Reports: Inaccuracies in credit reporting are common and can negatively impact your score. Dispute any errors you find using standardized dispute letter templates.
• Collections and Charge-Offs: Debts that have gone to collections or been written off can be very damaging. Pay off collections accounts to remove negative marks on your credit report and negotiate with creditors to settle debts for less than the full amount owed.

When to Seek Help

If you’re feeling overwhelmed by debt, struggling to understand your credit report or score, or facing issues with creditors or collections, it might be time to seek professional help. Here are some types of help available:

Credit Advisors

• These professionals can provide tips on how to get access to credit and help you develop a financial plan. They are particularly useful when you’re ready to start looking for a small business loan or need a better understanding of how to manage your finances effectively.
• Accion Opportunity Fund offers free credit advising. You can sign up to meet with a Credit Advisor here.
• Accion Opportunity Fund does not provide direct small business credit repair services, we are here to help you understand, assess, and build your own credit.

Traditional Credit Repair Services

• These services work to remove negative items from your credit report, negotiate with creditors to resolve debts, and offer comprehensive credit repair strategies.
• They can be particularly helpful if you have significant negative items on your credit report or need professional help to improve your credit score quickly.
• Non-profits are often the best resources for credit repair services. Trusted partner organizations, like Mission Asset Fund, Money Management International, and TrustPlus that specialize in credit repair.

Avoiding Credit Repair Scams

To avoid falling victim to small business credit repair scams, follow these guidelines:

• Deal with Reputable Agencies: Verify the legitimacy of any credit repair organization you consider.
• Look for Counseling and Education: Reputable agencies provide counseling and education as part of their services.
• Read Agreements Carefully: Understand all terms before signing any agreements.
• Avoid Upfront Fees: Be wary of any service that requires payment before any work is done.
• Check for High Fees or Required Contributions: Be cautious of services with high fees or mandatory contributions.
• Confirm Payments with Creditors: Ensure that any payments you make are applied correctly.

Nonprofit organizations like Mission Asset Fund, Money Management International, and TrustPlus are typically reliable and provide valuable services without the risk of scams.

Small Business Credit Repair Summary

Long-Term Strategies for Credit Health

Maintaining long-term credit health involves more than just quick fixes. Here are some strategies to ensure your credit remains strong:

• Consistently Apply Good Credit Habits: Make on-time payments, keep balances low, and manage your credit responsibly.
• Plan for Future Credit Needs: Anticipate and prepare for future financing needs to avoid last-minute scrambles.
• Regularly Review and Adjust Your Credit Strategy: Stay proactive in managing your credit and make adjustments as needed.
• Celebrate Small Victories and Stay Disciplined: Recognize and reward yourself for maintaining good credit habits to stay motivated.

Best Practices for Strong Business Credit

Fostering strong business credit requires a strategic approach:

• Separate Personal and Business Finances: This helps to protect personal assets and makes it easier to manage your business finances.
• Consider Every Credit Opportunity Carefully: Assess how each credit opportunity aligns with your business goals.
• Focus on Controllable Factors: Prioritize timely payments, monitor credit utilization, and manage outstanding balances.
• Use Credit to Grow Your Business: Leverage credit to invest in growth opportunities, but avoid overextending your business.

By understanding and managing your credit effectively, you can lay a strong foundation for your business’s financial health, opening up opportunities for growth and stability. Remember, good credit is an ongoing process that requires consistent effort and vigilance. With the right strategies and support, you can build and maintain strong credit, ensuring long-term success for your small business.

Disclaimer: While Accion Opportunity Fund does not provide direct small business credit repair services, we are here to help you understand, assess, and build your own credit. We can connect you with trusted partner organizations, like Mission Asset Fund, Money Management International, and TrustPlus that specialize in credit repair.