If you’ve ever wondered how to get a construction loan with bad credit, you’re not alone. The construction business can be risky, and business ups and downs can wreak havoc on a business owner’s credit. But construction business loans are often necessary for future success, and business owners who have imperfect credit are not without options.
Where to Find Loan Options
For various reasons, traditional lenders might not approve construction business owners with less than ideal credit for a loan. Fortunately, there are lenders who consider more than just credit scores and business history.
Some business owners with histories of financial challenges are able to get financing from friends, family members or investors who know and trust the business owners. But there are also construction business loans available from lenders that specialize in servicing small businesses. They are more likely to take time to get to know you, the business owner, and buy into your vision for your business. These lenders often offer customized financing solutions that fit your specific needs. The right solution may depend on how you plan to use the funds. For instance, if you need new tools or equipment for your business, an equipment leasing solution may be the right product.
Business owners with imperfect credit can certainly qualify for construction business loans. However, a lower credit score may require you to pay a slightly higher interest rate or agree to a shorter loan term. To continue to access business funding and get the best rates and terms, it’s important to work toward improving your credit score.
How to Improve Bad Credit
Even though you’re seeking a loan for your business, your personal credit score is still important. Some lenders will consider both the business credit history and the business owner’s personal credit score, but 50% of lenders rely only on the owner’s personal credit score. It’s important to understand the difference between business and personal credit scores so that you can understand how to improve your funding prospects moving forward.
If your credit score is preventing you from getting the business funding at the rates and terms you want, you can take the following steps to improve your score over time.
Understand How Your Credit Score Works
Also known as a FICO score, your personal credit score is assigned by credit reporting agencies such as Equifax, Experian and TransUnion. Your score is based on your personal debt experiences, including your payment history, outstanding balances and the length of credit. It ranges from 300 to 850, with 850 being the best possible score. The two most important components of your score are the total amount of money you owe, which is 30% of your score, and your payment history, which is 35% of your score.
Borrow Money and Repay It Responsibly
One way to improve your score is to borrow money (with a payment you can afford) and then repay it promptly. Since 35% of your credit score is based on payment history, you can improve your score by building a reliable payment history. That simply means paying bills on time. If you open a manageable construction business loan and make the payments on time every month, your score will gradually increase.
Also, if you don’t have much credit history, opening a new account, such as a business loan, can help improve your score simply by establishing a credit history. A lack of credit is not much better than bad credit, because lenders don’t have enough historical records to gauge whether they should take a risk on you. By opening a new account, you can help build a positive credit history and improve your score.
Pay Other Bills on Time, Every Month
Your credit score covers every debt you owe, including your phone bills, vehicle loans, business rent and utility bills. If you need to improve your score, commit to paying every bill on time, every month. Keep in mind that your credit score accounts for both positive and negative information. For example, late payments will lower your FICO score, but establishing or re-establishing a good track record of timely payments will raise your credit score.
Review Your Score and Report Errors
Federal law allows every consumer to access their credit report from each of the three reporting agencies every 12 months at no charge. Access yours annually at AnnualCreditReport.com and take the time to review what’s included; errors are not uncommon, and incorrect information could lower your score. If you find errors in your report, you should dispute the information in writing and send it to the credit reporting agency. The Federal Trade Commission provides detailed guidelines for disputing and correcting errors in a credit report, so follow those guidelines to make sure the incorrect information is removed.
Don’t Close Unused Accounts
While reviewing your credit report, you may notice that it includes an old credit card or credit account you no longer use. Even though it may seem like a good idea to close an unused account, don’t do it. It’s better to leave the account open to keep your score higher. That’s because an open account can decrease your credit utilization ratio, which is how much credit you’re using compared to the amount of credit available to you. It’s best to keep this ratio at or below 30%; for instance, if your open credit cards and loans offer you a total of $100,000 in available credit, your score will improve if you’re using only $30,000 of that available credit. By keeping unused accounts open, your total available credit is a larger number, making it easier for you to maintain your debts at or below 30% of that total.
If you’re wondering how to get a construction business loan with bad credit, you can certainly find options, possibly with higher rates. But to improve your opportunities for better financing options as your business grows, it’s also a good idea to work toward improving your credit score. That way, the next time you need construction business loans, you may be able to access the funding you need with the terms you want.