The cannabis industry offers tremendous opportunities, but securing financing can be challenging due to the unique legal and regulatory landscape. A good credit score is essential for obtaining cannabis business loans, as lenders rely heavily on creditworthiness to assess the risk of lending. Improving your credit score can significantly enhance your chances of securing the necessary funding.
Credit scores for cannabis business loans
Before diving into strategies to improve your credit score, it’s essential to understand what a credit score is and how it’s calculated. A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. It’s based on your credit history and is used by lenders to evaluate the risk of lending to you.
Credit scores are calculated using several factors:
- Payment history (35%) – Your track record of making on-time payments.
- Amounts owed (30%) – The total amount of debt you owe and your credit utilization ratio.
- Length of credit history (15%) – The age of your credit accounts.
- New credit (10%) – The number of new credit accounts and recent inquiries.
- Credit mix (10%) – The variety of credit types you have, such as credit cards, mortgages, and loans.
Strategies to improve your credit score
Review your credit report
Start by obtaining a copy of your credit report from all three major credit bureaus: Experian, Equifax, and TransUnion. Review the reports for any errors or discrepancies that could be negatively affecting your score. Common errors include incorrect personal information, inaccurate account details, and unauthorized accounts. Dispute any inaccuracies with the credit bureaus to have them corrected.
Pay your bills on time
Payment history is the most significant factor affecting your credit score. Make sure to pay all your bills on time, including credit cards, loans, utilities, and other obligations. Set up automatic payments or reminders to help you stay on track. Consistently making on-time payments will gradually improve your credit score.
Reduce your debt
The amount of debt you owe and your credit utilization ratio (the percentage of your available credit that you’re using) are crucial factors in your credit score. Aim to keep your credit utilization below 30%. To achieve this:
- Pay down existing debt as much as possible.
- Avoid maxing out your credit cards.
- Consider spreading your debt across multiple accounts if feasible.
Avoid opening too many new accounts
While having some new credit can be beneficial, opening too many new accounts in a short period can negatively impact your credit score. Each application results in a hard inquiry on your credit report, which can lower your score. Be strategic about applying for new credit and only open accounts when necessary.
Maintain older accounts
The length of your credit history plays a significant role in your credit score. Keeping older accounts open can positively impact your score, as it shows a longer history of credit management. Avoid closing old accounts, even if you don’t use them frequently, as this can shorten your credit history and negatively affect your score.
Diversify your credit mix
Having a diverse mix of credit types, such as credit cards, mortgages, and loans, can positively impact your credit score. If you have only one type of credit, consider adding another, such as a small personal loan or a credit card. However, ensure that you can manage any additional debt responsibly.
Monitor your credit regularly
Regularly monitoring your credit allows you to stay informed about your credit status and detect any potential issues early. Many financial institutions and credit bureaus offer free credit monitoring services. By keeping a close eye on your credit report, you can take proactive steps to address any problems that arise.
Building business credit
In addition to your credit score, building a strong business credit profile is crucial for securing loans for cannabis. Here are steps to build and improve your business credit:
Establish a business entity
Forming a legal business entity, such as an LLC or corporation, separates your personal and business finances. This is the first step in building a distinct business credit profile. Register your business with the appropriate state authorities and obtain any necessary licenses and permits.
Obtain an Employer Identification Number (EIN)
An EIN is a federal tax identification number for your business, similar to a Social Security number for individuals. You’ll need an EIN to open business bank accounts, apply for business licenses, and establish business credit.
Open a business bank account
Opening a business bank account helps separate your personal and business finances. It also establishes a banking relationship that can be beneficial when applying for capital for the cannabis business. Use this account for all business transactions to maintain clear and organized financial records.
Apply for a business credit card
A business credit card can help build your business credit profile. Use the card for business expenses and make timely payments to demonstrate responsible credit management. Look for cards that report to the major business credit bureaus, such as Dun & Bradstreet, Experian Business, and Equifax Business.
Establish trade lines with vendors
Working with vendors that extend credit terms can help build your business credit. Request net-30 or net-60 payment terms from suppliers and ensure you pay invoices on time. Some vendors report payment history to business credit bureaus, which can positively impact your business credit score.
Monitor your business credit
Regularly check your business credit reports to ensure they accurately reflect your credit history. Dispute any errors or inaccuracies with the business credit bureaus. Monitoring your business credit allows you to stay informed about your credit status and take proactive steps to improve it.
Leveraging professional help
Improving your credit score can be a complex and time-consuming process. Consider seeking professional help to guide you through the process:
Credit counseling
Credit counseling agencies can provide advice and resources to help you manage debt and improve your credit. Look for reputable, nonprofit credit counseling organizations that offer personalized services.
Financial advisors
A financial advisor can help you develop a comprehensive financial plan to improve your credit score and overall financial health. They can guide budgeting, debt management, and credit-building strategies.
Credit repair services
Credit repair services can help identify and dispute errors on your credit report. However, be cautious when choosing a credit repair company. Research their reputation and ensure they comply with the Credit Repair Organizations Act (CROA).
Improving your credit score is a crucial step in securing business loans. By understanding the factors that influence your credit score and implementing strategies to enhance it, you can significantly improve your creditworthiness. Additionally, building a strong business credit profile can further strengthen your loan application. Remember, improving your credit score is a gradual process that requires consistent effort and financial discipline.
Alta Real Estate Fund is the best option if you are looking for loans for cannabis. They understand their client’s businesses and needs and come up with creative tailor-made finance structures that make the company’s performance simpler and more efficient. Contact them by visiting their website or writing to ir@alta-financial.com.