In tough economic times, attaining access to capital can be a daunting task -- real or perceived. The truth of the matter is that while some lenders may have tightened up their lending criteria, some of the same rules apply. For the typical small business owner, lenders are going to look first to your personal credit score as a ‘go, no go’ barometer. Like it or not, financial institutions use your credit score to determine if you meet their basic lending criteria.
For small business owners seeking start-up capital, working capital loans or money to fund expansion it is important to understand your credit score and what impact that little number has on your ability to get loans. Your FICO score, the most commonly known score, was created by the Fair Isaac Corporation and is the industry standard. However, it is important to note that you have more than one score, three in fact. Each of the credit reporting agencies compute your credit score individually and it is absolutely possible to have three entirely different scores.
Personal credit scores typically range between 300 and 850. The higher your score, the better. A good credit score is usually 700 or better. With a credit score of 700, a potential borrower may have access to a wider array of products offered at more favorable interest rates and terms. And, it is worth mentioning that just because you have a credit score of 700 or better, financing is not guaranteed-- some lenders may still require additional information such as personal income, net worth, time in business.
Your credit score is calculated based on your payment history, the amount of debt that you have currently outstanding, the length of your credit history, the mix of credit you currently have, and new account applications. Thirty-five percent of your score takes into account how you pay your bills, thirty percent is based on your debt-utilization ratio, fifteen percent is based on how long you have had credit, ten percent factors in if you have a mixture of revolving and installment type debt, and the remaining ten percent is based on how many recent inquiries posted to your credit report.
Here are some tips to help you maintain an optimal credit score:
1. Pay your bills on time. Late payments can reduce your score by as much as 20 points.
2. Do not close old accounts. Pay your bills down, but do not close your long standing accounts. Keep them active by using them and paying the balance down in full on a monthly basis.
3. Develop a strong portfolio of credit. Three to five lines of credit are optimal – at least two installment type loans, i.e. mortgage, car loan, etc; and no more than three revolving type accounts like credit/charge cards.
4. Do not max out your credit cards. Never carry a balance of more than fifty percent on any of your credit cards – keeping your debt utilization ratio below 30% is optimal.
5. Just say no. A hard inquiry is placed on your credit report every time you apply for one of those department store credit cards or any other type of credit. A good mixture of credit is important, but too much outstanding debt makes potential lenders nervous about your ability to repay -- when in doubt, see Tip #3.
6. Know where you stand. Last, but certainly not least, pull your credit report. It is important for you to know what information is listed on your report and to remedy any errors that may appear there. At the time of this posting, it is known that you can request one copy of your credit report for free via email, snail mail or fax from each of the three bureaus through the one centralized source authorized by all three credit bureaus from www.annualcreditreport.com.
Here’s to your business success!
For additional information on your credit reports contact each of the major credit bureaus:
For additional information on credit, contact the Federal Trade Commission:
