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8 Ways to Build Your Business Credit Score

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Small business finance often mires personal investment and credit with business purchases and expansion. By establishing a business credit score, you can take an important first step toward creating a dividing line between your business and personal finances, even if you’re running a sole proprietorship or partnership.

Business credit is a major financial tool for your business. It’s used to help you qualify for loans and other forms of financing. It’s also an essential tool for building relationships with vendors and other business-to-business (B2B) sellers. Business credit can function as a useful bargaining or negotiation tool when you enter into price and service discussions with other businesses. Overall, it’s a major indicator of how healthy and reliable your business is financially. Without business credit, your company will struggle to find loans, apply for credit cards, establish relationships with vendors and succeed as a small business.

Having good credit is always the goal, but when it comes to business credit, it’s also important to understand how bad credit can affect your business. The most impactful aspect of business credit is your ability to secure financing. If you have bad credit, you won’t be able to qualify for loans, credit cards and other types of financing. This can be catastrophic for a new business on the cusp of growth. Yet, according to Nav, 82% of small business owners don’t know how to interpret their business credit score. When you understand your score and maintain it at a high level, you’re on your way to running a successful business.

Here are five benefits of having good business credit:

Having a good business credit score allows you to not only qualify for loans and other financing but also get lower interest rates on those loans. This means the price for borrowing is lower, which, in turn, saves your business money. Especially for loans from conventional banks, having a good business credit score can be one of the most important aspects of obtaining a loan with favorable rates and terms. [Read related article: How to Get a Bank Loan for Your Small Business]

With certain B2B products and services, you may need to prepay. If you have a solid business credit score, these vendors and service providers may not require you to put any money down to get started. That means you can better manage your business’s cash flow when establishing services. While this may seem like a small advantage, this kind of perk can have a major financial impact on your business’s operations.

Your credit score can act as a bargaining chip when it comes time to negotiate deals with vendors and suppliers. If you have a good credit score, you may be able to talk down prices, extend contract lengths or, if you’re seeking financing, lower your interest rate.

One overlooked benefit of understanding your business credit score is the ability to divide your personal and business finances. Small business owners often invest a lot of their personal assets and savings into their business. In many cases, this is the nature of building a small business.

Part of building your business, however, is slowly separating your personal financial commitments from your business financial commitments. By establishing a business credit score, you’re taking one of the most important initial steps in doing this. Especially in a business world where most lenders require their borrowers to sign personal guarantees, having a business credit score can be essential to limiting your personal exposure on business-related ventures.

Long-term success in business means building on a conservative financial basis and taking risks when new expansion is necessary. To achieve and maintain a good credit score, you need to develop certain financial habits. That means you’ll be saving money, planning your financial future and creating a stable and sustainable company. Having and maintaining a good business credit score means building a successful, long-term company.

Key takeaway: Having a good business credit score has several advantages, including better financing options and vendor terms that ease cash flow.

The importance of a good business credit score is unparalleled, but how can you build a good credit score from the ground up? The first step is to establish your business legally and file with various business credit reporting agencies. The second step is to develop good financial habits to maintain your credit score. Finally, you’ll want to monitor your score throughout the year to ensure your score accurately reflects the positive financial habits you’re developing.

Here is a detailed step-by-step guide to building business credit:

The first step toward building business credit is to establish your business legally as a sole proprietorship, corporation, partnership or limited liability company. Create a legal name, and set up a business phone number, which will give your company added credibility with vendors and the government. Once the basic legal aspects of your company are created, begin opening accounts with vendors that report to the credit bureaus to establish your business credit file and start building credit. As with legally creating your business, this makes your company known to business credit reporting agencies.

Depending on the type of business you establish as a legal entity, you may have already completed this in step 1. It is important, however, to confirm that you’ve completed all of the steps required by the secretary of state to ensure your business has been registered and created properly.

Your EIN, or employer identification number, is like your business’s Social Security number; it’s what the government uses to identify your business. Your EIN is also a major piece of information for paying business taxes throughout the year. By requesting this number once your business is registered, you’re gaining a corporate ID number that you will use to file taxes, open a business bank account and apply for business licenses.

Get started on separating your business finances from your personal finances by establishing a business bank account. Setting up this type of account will also help you get a business credit card and begin building a relationship with a banking partner that may be beneficial down the road if you need a small business loan to grow your operations.

As you build your business, continue establishing and building relationships with vendors, and create contracts for supplies and other business materials. You build credit by paying on time or early with vendors that report to credit agencies. Not all do, and not all vendors report to the same credit agencies. Consider what your business needs, then look up which vendors in that vertical report to credit agencies.

Opening, using and paying off business credit cards is another way to build business credit. Once your bank account is established and your business is in operation, open a business credit card and use it each month. Research which credit card is best for your business. Some cards may offer rewards that can be advantageous for certain types of businesses. Keep in mind that, especially if you’ve just started your business, your credit limit may be rather low when you start out. As you build your credit score, your credit limit will increase.

One of the most powerful tools you have when building credit is simply paying your bills. By paying your bills in full and on time, you’re proving that you can make good on your debts. If you pay bills early, however, you may be able to build your business credit score even faster. Credit is essentially an agreement between you and a lender that you’ll pay them later for a product or service (or access to money, in the case of credit cards) you need now. So, when bills come due, make sure you pay them. This is the most basic concept behind building credit.

An important aspect of building a credit score is credit utilization. Much like with personal credit cards, business credit cards have a recommended usage so you can maximize your credit score. It’s recommended that a business owner use no more than 30% of their total credit limit. This proves to lenders that you’re not only financially responsible but more than able to meet your minimum balance each month.

Key takeaway: New businesses can build credit by legally establishing the business, opening credit accounts with a bank and vendors that report to the credit agencies, and paying their bills on time.

One of the most important steps of building a good credit score is maintaining it once you reach the level you want. Paying bills on time or early and establishing good relationships with credit card companies are two of the easiest ways to maintain your business credit score.

However, it’s important to keep in mind that part of building good credit is developing strong financial habits: saving money, paying bills and taxes on time, making informed financial decisions about the future of your business, and developing good relationships with suppliers and other businesses. While these aspects may not directly affect your credit score, they feed into the holistic financial experience your business needs to exemplify.

Another crucial aspect of maintaining your business credit score is monitoring it to ensure it’s accurate. Occasionally, businesses must dispute errors and other issues on their credit report that don’t accurately reflect what really happened with a certain financial transaction. Monitoring your business credit score isn’t difficult, but it’s important to understand the best way to go about doing it.

Some third-party sites offer companies notifications when their credit scores change at the big agencies. This can be a good option for monitoring your credit score throughout the year. Another option is to check with individual business credit reporting agencies on your own. It’s not complicated to do so, but you may have to register directly with the agencies, which include Experian, Dun & Bradstreet and Equifax.

Key takeaway: To maintain your business credit score, you must continue to build healthy financial habits, such as paying your bills and taxes on time. You should also monitor your business credit score for accuracy.

Having a business credit score is essential to running a financially viable and healthy business. It proves to lenders and other businesses that your company is financially healthy and capable of making important payments. It will not only help you get loans but can also provide you with opportunities to avoid prepayment. As a negotiation tool, a good credit score can help you drive down prices or obtain more favorable interest rates and terms on financing packages from banks and online lenders.

The best way to build credit, once your business is legally established, is to pay your bills on time – and early where possible. By opening credit cards and keeping your credit utilization below 30%, you can further establish a favorable credit rating. Keep building your company’s financial reputation, and check in with the major credit agencies from time to time to ensure your credit score is accurate.

Key takeaway: Building and maintaining good business credit requires you to consistently demonstrate that you are capable of repaying your debts.

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How to Avoid a Prepayment Penalty When Paying Off a Loan | Pennyhoarder

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Look at you, so responsible. You received a financial windfall — stimulus check, tax refund, work bonus, inheritance, whatever — and you’re using it to pay off one of your debts years ahead of schedule.

Good for you! Except… make sure you don’t get charged a prepayment penalty.

Now wait just a minute, you say. I’m paying the money back early — early! — and my lender thanks me by charging me a fee?

Well, in some cases, yes.

A prepayment penalty is a fee lenders use to recoup the money they’ll lose when you’re no longer paying interest on the loan. That interest is how they make their money.

But you can avoid the trap — or at least a big payout if you’ve already signed the loan contract. We’ll explain.

What Is a Loan Prepayment Penalty?

A prepayment penalty is a fee lenders charge if you pay off all or part of your loan early.

Typically, a prepayment penalty only applies if you pay off the entire balance – for example, because you sold your car or are refinancing your mortgage – within a specific timeframe (usually within three years of when you accepted the loan).

In some cases, a prepayment penalty could apply if you pay off a large amount of your loan all at once.

Prepayment penalties do not normally apply if you pay extra principal in small chunks at a time, but it’s always a good idea to double check with the lender and your loan agreement.

What Loans Have Prepayment Penalties?

Most loans do not include a prepayment penalty. They are typically applied to larger loans, like mortgages and sometimes auto loans — although personal loans can also include this sneaky fee.

Credit unions and banks are your best options for avoiding loans that include prepayment penalties, according to Charles Gallagher, a consumer law attorney in St. Petersburg, Florida.

Unfortunately, if you have bad credit and can’t get a loan from traditional lenders, private loan alternatives are the most likely to include the prepayment penalty.

Pro Tip

If your loan includes a prepayment penalty, the contract should state the time period when it may be imposed, the maximum penalty and the lender’s contact information.

”The more opportunistic and less fair lenders would be the ones who would probably be assessing [prepayment penalties] as part of their loan terms,” he said, “I wouldn’t say loan sharking… but you have to search down the list for a less preferable lender.”

Prepayment Penalties for Mortgages

Although you’ll find prepayment penalties in auto and personal loans, a more common place to find them is in home loans. Why? Because a lender who agrees to a 30-year mortgage term is banking on earning years worth of interest to make money off the amount it’s loaning you.

That prepayment penalty can apply if you want to pay off your loan early, sell your house or even refinance, depending on the terms of your mortgage.

However, if there is a prepayment penalty in the contract for a more recent mortgage, there are rules about how long it can be in effect and how much you can owe.

The Consumer Financial Protection Bureau ruled that for mortgages made after Jan. 10, 2014, the maximum prepayment penalty a lender can charge is 2% of the loan balance. And prepayment penalties are only allowed in mortgages if all of the following are true:

  1. The loan has a fixed interest rate.
  2. The loan is considered a “qualified mortgage” (meaning it can’t have features like negative amortization or interest-only payments).
  3. The loan’s annual percentage rate can’t be higher than the Average Prime Offer Rate (also known as a higher-priced mortgage).

So suppose you bought a house last year and then wanted to sell your home. If your mortgage meets all of the above criteria and has a prepayment penalty clause in the mortgage contract, you could end up paying a penalty of 2% on the remaining balance — for a loan you still owe $200,000 on, that comes out to an extra $4,000.

Prepayment penalties apply for only the first few years of a mortgage — the CFPB’s rule allows for a maximum of three years. But again, check your mortgage agreement for your exact terms.

The prepayment penalty won’t apply to FHA, VA or USDA loans but can apply to conventional mortgages — although the penalty is much less common than it was before the CFPB’s ruling.

“It’s more of private loans — loans for people who’ve maybe had some struggles and can’t qualify for a Fannie or Freddie loan,” Gallagher said. “That block of lending is the one going to be most hit by this.”

How to Find Out If a Loan Will Have a Prepayment Penalty

The best way to avoid a prepayment penalty is to read your contract — or better yet, have a professional (like an attorney or CPA) who understands the terminology, review it.

“You should read the entirety of the loan, as painful as that sounds, because lenders may try to hide it,” Gallagher said. “Generally, it would be under repayment terms or the language that deals with the payoff of the loan or selling your house.”

Gallagher rattled off a list of alternative terms a lender could use in the contract, including:

  • Sale before a certain timeframe.
  • Refinance before a term.
  • Prepayment prior to maturity.

“They avoid using the word ‘penalty,’ obviously, because that would give a reader of the note, mortgage or the loan some alarm,” he said.

If you’re negotiating the terms — as say, with an auto loan — don’t let a salesperson try to pressure you into signing a contract without agreeing to a simple interest contract with no prepayment penalty. Better yet, start by applying for a pre-approved auto loan so you can get a pro to review any contracts before you sign.

Pro Tip

Do you have less-than-sterling credit? Watch out for pre-computed loans, in which interest is front-loaded, ensuring the lender collects more in interest no matter how quickly you pay off the loan.

If your lender presents you with a contract that includes a prepayment penalty, request a loan that does not include a prepayment penalty. The new contract may have other terms that make that loan less advantageous (like a higher interest rate), but you’ll at least be able to compare your options.

How Can You Find Out if Your Current Loan Has a Prepayment Penalty?

If a loan has a prepayment penalty, the servicer must include information about the penalty on either your monthly statement or in your loan coupon book (the slips of paper you send with your payment every month).

You can also ask your lender about the terms regarding your penalty by calling the number on your monthly billing statement or read the documents you signed when you closed the loan — look for the same terms mentioned above.

What to Do if You’re Stuck in a Loan With Prepayment Penalty

If you do discover that your loan includes a prepayment penalty, you still have some options.

First, check your contract.

If you’ll incur a fee for paying off your loan early within the first few years, consider holding onto the money until the penalty period expires.

Pro Tip

If you don’t have a loan with a prepayment penalty, contact your lender before sending additional money to ensure your payment is going toward principal — not interest or fees.

Additionally, although you may get socked with a penalty for paying off the loan balance early, it’s likely you can still make extra payments toward the balance. Review your contract or ask your lender what amount will trigger the penalty, Gallagher said.

If you’re paying off multiple types of debt, consider paying off the accounts that do not trigger prepayment penalties — credit cards and federal student loans don’t charge prepayment penalties.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.

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10 things you didn’t know will help you get a mortgage

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Anyone who wants to apply for a mortgage right now will know that it’s not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance  weigh in with the top tips for making sure your application is a success – that you may not have heard about. 

1. Make sure your name is on all household bills

If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time. 

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How Can I Prequalify for a Personal Loan? A Guide

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When you are in need of money quickly, you very likely don’t want to sit around pondering a bunch of different options. You want to find the option that works best for you and utilise it. Unfortunately for so many people around the country, it can be difficult to get their hands on the money they need due to them having a bad credit score, or even no credit score at all.

How Can I Prequalify for a Personal Loan?

Photo, Varun Gaba.

Your credit score is thought of as being pretty important, as it shows your financial trustworthiness to financial institutions like banks, credit card companies, lenders, and more. Your credit score is one thing that will usually be considered by just about any company you apply for a loan through, so keeping a close eye on your credit score is imperative for your financial life.

No matter what your credit score looks like, knowing how you can prequalify for a personal loan can be a comforting feeling when you are in need of quick cash. After all, when you are eligible for personal loan prequalification, you feel a little better going into the loan process knowing you won’t have to wait around for a loan decision.

How is Pre-qualification Decided? Prequalifying for a personal loan can depend on several different factors that you will have to keep in mind, and it will vary greatly depending on the lender you are applying through. Here are two of the things you will need to keep in mind when it comes to your loan that could affect whether or not you prequalify for the loan.

— Your credit score; Yes, this is always going to be something you are going to need to think about. Depending on the financial institution or lender you are going through, you can bet that your credit history and score will play a huge part in whether or not you prequalify.

— The amount of your loan; How much money you plan on borrowing from the lender or bank is also going to play a part in deciding whether or not you prequalify.

To get the most out of your search for a lender that you could prequalify with, think about applying with more than just one lender. This way, you might get several pre-qualification offers, and this will allow you to sort through the lenders and decide which one works best for you.

How Can I Prequalify for a Personal Loan?

Photo, Christina @ wocintechchat.com.

The Pre-qualification Process: No matter where you are trying to prequalify for your loan through, you will find the process to be pretty simple and largely similar across most lending platforms. You will need to provide some information to the lender that will help them decide whether or not to prequalify you.

How Can I Prequalify for a Personal Loan?

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Some of the information you will need to provide includes:

— Your full name; You will want to make sure you provide your full legal name so you can make the process simple for yourself and the lender. Depending on the lender, you might also be asked to provide images of your government issued ID or driver’s license to validate your identity.

— Your income and information on your job; Your income and employment status are often considered over your credit score when it comes to pre-qualification for loans, especially if you are applying for a personal loan through a lender who deals with customers with bad credit or no credit.

— The loan amount you want; Of course, you will have to include the amount of money you would like to borrow. Make sure it is something reasonable, and something that you can realistically pay back on time.

What Will the Lender Do? If you are trying to prequalify through a lender who specialises in bad credit clients, then you won’t have to worry about your credit score being negatively affected by taking out your loan. However, if the lender reports to the credit bureaus, your payments could still make an impact on your credit score.

If not working with a specialised lender, you might find that the lender will do a soft inquiry on your credit when going through the pre-qualification process. No worries here, as this doesn’t put any dents in your score. If you prequalify for the loan you are looking for, you should get an alert via email from the lender of your choice.

The Money You Need: Hopefully, you will have prequalified for the loan you are looking for so you can ensure you have access to the money you need, when you need it. Whether you’re going through some unexpected circumstance in life or just need money to pay something off quickly, knowing you are prequalified for the loan you need is a comforting feeling, allowing you access to the cash you need for whatever you need it for.



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