Building a good FICO credit score is critical for entrepreneurs and small business owners. At some point you may need to obtain capital from a bank or lender. These banks and lenders may require you to have a good credit score to get approved for financing. If you don’t have a good credit score, getting any type of debt financing for your small business may be difficult. There are alternative financing options for entrepreneurs and small business owners with a bad credit score. However, they are usually only available to established businesses. Entrepreneurs with newly launched small businesses may not qualify for these alternative financing options. This is why building a good credit score is so important. You will have more options to finance your business, whether it’s a startup or established.
The 1st Step is Knowing the Different Types of Credit Scores
There are several different consumer credit score models. Banks and lenders use these consumer credit score models to determine what type of credit risk a borrower will be. Borrowers can be low, moderate or high credit risks. The most popular score model is the FICO credit score. The VantageScore is another score model that more banks and lenders are using. 90% of banks and lenders still use the FICO credit score model. Only 10% of banks and lenders use the VantageScore model. However, it’s still important to know what constitutes a good FICO score and VantageScore. Both the VantageScore and FICO credit score range between 300 and 850, with 300 being the worst and 850 being the best.
The Next Step is Understanding What Constitutes a Good Credit Score
A good FICO score and VantageScore depends on several factors. This includes paying your debts on time, balances you owe towards your debts, age of your credit file, types of credit, new credit, percent of credit limit used, and available credit. To build and maintain a good credit score you should do the following:
- Make timely payments – Paying your bills on time every month has the biggest effect on your credit score. One late monthly payment may cause your credit score to drop significantly. Your good credit score can quickly turn into a bad credit score if you consistently make late payments. A bad payment history will cause you to develop poor credit score. A poor credit score will prevent you from getting any type of financing.
- Minimize your outstanding debt – While having a mix of different credit accounts is good, too much debt can be detrimental to building a good credit score. This can also negatively affect your debt-to-income ratio. Your debt-to-income ratio is your monthly debt payments in comparison to your monthly income. Lenders will use this ratio to determine your ability to manage new debt. If your monthly payment towards your debt greatly exceed your monthly income, you may get denied for new types of financing.
- Keep credit accounts open for a long time – The age of your credit file gives banks and lenders a good idea of how well you manage debt over time. To build a long credit history starting now, get at least one credit card in your name. Use the credit card for small purchases and pay it off every month, on time. You can’t build a good credit score if you don’t open at least one credit account. A credit file with a short credit history doesn’t give banks and lenders much to go on when trying to determine your credit worthiness. You may be denied if you have very little information on your credit report.
- Get loans and credit cards in your name – To build a good credit score, you need to diversify the types of credit accounts you have in your name. A combination of a car loan, credit card and mortgage loan constitutes a good credit mix. For example, when you apply for a mortgage loan, a mortgage lender may look to see if you’ve had an auto loan. An auto loan and a mortgage loan are both term loans. Since they both require a borrower to pay off a certain amount over time (by a certain date), lenders use them to measure how well you manage that type of debt. If you apply for something like an unsecured business credit card, a lender will check your credit report to see how well you manage personal credit cards. This is because a personal credit card and unsecured business credit card is revolving debt. If you made late payments or defaulted on a car loan or a personal credit card, you may get denied for similar types of financing.
- Don’t apply for new loans or credit card debt at the same time – Applying for different types of financing or the same type of financing with different lenders will cause your good credit score to drop. For example, if you apply for five personal credit cards in the same week, with different lenders, your good credit score will drop. It will also create a lot of hard inquiries on your credit report. Hard inquiries are caused by lenders pulling your credit report to check your credit score and history when you apply for any type of financing.
- Keep your credit card debt low – High credit utilization will cause your good credit score to drop. High credit utilization is using almost all of your total available credit limit. A high credit utilization rate is anything over 30%. For example, if you have a personal credit card with a limit of $6,000, you should use no more than $1,800 of it. Lenders see credit cards as maxed out once you reach 30% credit utilization. This is because history has proven that borrowers with a credit utilization rate over 30% have a greater chance of defaulting on their credit card debt.
How Your FICO Scores are Weighed
Your FICO score is weighed based on your payment history (35%), amounts owned (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Your VantageScore is weighed based on payment history (40%), age and type of credit (21%), percent of credit limit used (20%), total balances/debt (11%), recent credit (5%), and available credit (3%). As you can see, how your credit score is calculated is slightly different for each scoring model. Again, this is why it’s important to know both your FICO credit score and VantageScore before you apply for small business financing.
How Does a FICO Score Differ from a VantageScore?
There are several differences between the FICO score and VantageScore. The FICO score range and VantageScore range differ. The FICO score range is 300 to 850. The VantageScore range is 501 to 990 (for older models of the scoring system). In 2013 the new VantageScore range changed to 300 to 850 to appease banks, lenders and consumers. Banks, lenders and consumers wanted the VantageScore range to be the same FICO credit score range to make it easier to read credit reports. The categories that are analyzed to determine your credit score also slightly differ for each score model. The VantageScore model focuses on the following categories to compile your credit score:
- Payment History – 40% of your VantageScore is based on how timely you make payments.
- Age & Type of Credit – 21% of your VantageScore is based on the age of your credit profile and the types of credit accounts you have.
- Percent of Credit Limit Used – 20% of your VantageScore is based on your credit card utilization. (Having credit cards that are maxed out will decrease your score dramatically and interfere with your ability to obtain small business financing such as unsecured business lines of credit).
- Total Balances/Debt – 11% of your VantageScore is based on the amount of outstanding debt you have.
- Recent Credit – 5% of your credit score is based on how recent you have applied for and/or opened credit accounts.
- Available Credit – 3% of your credit score is based on how much available credit you have on your credit card(s) in comparison to the total credit limit(s).
Building a Good Credit Score Takes Time, One Mistake Can Ruin It
Building a good credit score and history takes time. There is no way to cheat the credit scoring system no matter what anyone tells you. That’s why once you build a good credit score, you have to do everything in your power to keep it. One mistake, like a late payment, can cause your good credit score to drop. Lenders will take that one late payment into account when you apply for financing. Most lenders don’t want you to have any late payments in the last 2 to 3 years when you apply for financing. Here is the best book on credit I have found: The Smart Consumer’s Guide to Good Credit: How to Earn Good Credit in a Bad Economy by John Ulzheimer.
Check Your Own Credit Report Before You Apply for Any Type of Financing
You can pull your own credit report to check if you have a good FICO score or VantageScore. There are many free credit report and free credit score sites online. However, they are not always accurate or provide the detailed information you need to analyze your credit rating. The best free credit report and free credit score site for entrepreneurs and small business owners is NAV. NAV provides entrepreneurs and small business owners with their FICO score and VantageScore, as well as their business credit scores. I always suggest entrepreneurs and small business owners use NAV because it is the ONLY site only that will provide you with free access to your personal and business credit information.
NAV also offers paid plans for entrepreneurs and small business owners who want to see more information than what is in their free plan. Their best paid plan is $29.99 per month and is designed specifically for entrepreneurs and small business owners that plan on applying for financing in the next six months. A credit report from NAV will help you thoroughly analyze your credit history and prepare to build a good credit score so you can qualify for small business financing.
What You Need to Know About Checking Your Credit Using Free Credit Score Sites
Before you use one of the many free credit score sites online, you should know that not all of them are 100% accurate or detailed. What I mean is, many free credit score sites do not provide you will a full credit report. They usually just how you your credit score and what’s currently impacting your score. Furthermore, each free credit score site provides different types of credit scores. For example, the websites credit karma and credit sesame provide what’s called a VantageScore. So if you want to get a free FICO score, these sites aren’t going to help.
For entrepreneurs and small business owners, knowing both your FICO credit score and VantageScore is critical to understanding whether you will qualify for small business financing. Most banks and lenders still use the FICO score model to determine the credit worthiness of their applicants. However, the VantageScore is becoming more popular. So when using a free credit score site, it’s important that you get both scores. Knowing both is good because the factors that make up each score are slightly different.
Know Your Rights, Study the Fair Credit Reporting Act
In addition to understanding how credit scores are compiled, it’s important to know what rights you have regarding what’s reported. Knowing your rights in this area is critical because it’s what reports on your credit that effects your overall credit score. The Fair Credit Reporting Act was created to protect consumers from a number of things that can have an adverse effect on our ability to obtain new credit. Click here to learn more about how the Fair Credit Reporting Act can help you in the process of repairing your credit. Its 108 pages long. But if you’re serious about building and maintaining an excellent credit history, you can breeze through it in a few hours.
You Need to Know More Than a Free Credit Score Before You Apply for Small Business Financing
Getting a free credit score is not enough when you plan on applying for small business financing. You also need to see the data that make up those scores. The data that make up the scores is your credit accounts. Your credit accounts make up your credit history. Your credit accounts, credit history, and credit scores give you the full picture of where you may stand with lenders in terms of credit risk and credit worthiness.
Banks and lenders will review your credit accounts, credit history and scores when assessing your credit worthiness. You need to be able to see what they are going to see before you apply for small business financing. It will help you better prepare yourself if your credit score isn’t where it needs to be. It will also help you understand what chances you have of qualifying for small business financing before you actually apply.
Get Your Free Credit Score from NAV Before You Apply for Small Business Financing
Here at LenCred, thousands of entrepreneurs and small business owners come to us seeking capital each year. Checking the credit scores and reports of the people who apply for funding through us has been critical to our success. After years of helping entrepreneurs and small business owners get capital, we have discovered the best free credit score site online for this specific group of people. As I stated before, knowing both your FICO score and VantageScore is important if you plan on applying for small business financing. However, knowing your business credit score is also important. That’s why we require the entrepreneurs and small business owners who apply for our funding programs to obtain their free FICO score and VantageScore from NAV.
NAV was designed specifically for entrepreneurs and small business owners who need a credit monitor service that enables them to track their personal and business credit scores. As an entrepreneur and small business owner, both your personal and business credit score can impact your ability to get small business financing. NAV provides personal credit reports and scores from Experian and Transunion. Experian provides you with your FICO score and Transunion provides you with your VantageScore. On the business credit side, NAV provides the Dun & Bradstreet PAYDEX Score, Intelliscore PLUS Score from Experian and the FICO LiquidCredit Score.
Business credit scores are primarily determined based on how timely you pay on your business accounts. If your business is well established, lenders will check your business credit history to determine if you’re consistently making timely payments towards your business accounts. Business accounts can include retail trade lines with companies like Quill or business credit cards with lenders like Bank of America.
NAV Offers a Free Credit Score Option for Entrepreneurs & Small Businesses
Free credit score sites like credit karma and credit sesame aren’t going to cut it for entrepreneurs and small business owners. Their accuracy is always questionable and they simply don’t provide enough information for you to prepare yourself to apply for small business financing. While free is good in some instances, it’s not when it comes to a credit report company. Entrepreneurs and small business owners need a free credit score site that gives insight on their business and personal credit scores and history.
NAV does offer a free credit score option for startups, entrepreneurs, and small business owners that are beginners in building business credit. However, the free option provides limited information. You will only be able to see your personal credit score and credit report summary from one major credit bureau. Furthermore, you will only be able to see letter grades from two of the major business credit bureaus. While a free account is good to get you started, eventually you’ll want to upgrade to a paid plan.
Paid plans provide you with detailed information via all 3 major credit bureaus on the personal and business credit side. NAV paid plans range from $14.99 to $49.99. At LenCred, we usually recommend that our applicants purchase the $14.99 or $29.99 plan. The $29.99 is affordable for most and provides you (and us) with enough information to properly access your credit history to determine if you will qualify for small business financing.
Why You Should Know Your FICO Credit Score Before You Apply for Small Business Financing
You’re FICO credit score is designed to give small business lenders a clear understanding of how well you manage debt. The majority of small business lenders use your FICO credit score to determine whether you qualify for small business financing. This is why it’s important that you know your FICO credit score before you apply for small business financing. Knowing your FICO credit score also means understanding what information is on your individual credit report. The information reported to a major credit bureau via your creditors is what’s on your individual credit report. That information determines your FICO credit score.
Your Consumer Credit History Influences Your FICO Credit Score
A good credit score is based on a good consumer credit history. The information a credit bureau reports on your consumer credit file is used to calculate your FICO credit score. Your FICO credit score is calculated based on five components. These components make up the FICO score model. The FICO score model uses your payment history, amounts owed, length of credit history, credit mix and new credit to calculate your FICO credit score. This is why the information reported by a major credit bureau to your consumer credit file is more important than your actual FICO credit score.
Other Credit Score Models That Are Good to Know About
There are other lesser known consumer credit score models such as the PLUS score, TransRisk, ScoreSense, CreditXpert, and the Experian National Equivalency Score. Equifax also has its own scoring model. The decision-making process is similar for all of the other score models. These score models also use your payment history, age of history, total debt, total utilization, types of credit, and new credit obtain to determine your overall credit risk. Most of these other scoring models are not necessarily used by banks and lenders. However, they are designed to help consumers better understand how lenders use our credit profiles to determine our credit risk level.
What Small Business Lenders Look for on Your Credit Report
Small business lenders focus on your payment history, amounts owned on loans or lines of credit, the length of your credit history, the different type of credit accounts in your name, and any new credit accounts you have applied for in the last six months. They focus on these components of your credit report because this is what is used to calculate your FICO credit score. Each component used to calculate your FICO credit score gives a small business lender a good idea of how well you manage debt. An explanation of each component of the FICO score model (and how lenders view each component) is below.
- Payment History (35% of Your FICO Credit Score) – Small business lenders will look at your payment history to see how often you pay your monthly bills on time. If you have more than 2 late payments in the last 24 months, it could negatively impact your ability to get approved for small business financing. This is especially true for unsecured business lines of credit. If you are applying for unsecured business lines of credit, your payment history for the last 2 years needs to be immaculate.
- Amounts Owed (30% if Your FICO Credit Score) – The amounts you owe toward your existing debts is also important to small business lenders. If you have too much debt, lenders may feel that you won’t be able to manage any additional debt. Therefore when applying for small business financing, it is ideal that the amount of outstanding debt you have is low. If you are unsure if whether you have too much outstanding debt (in comparison to your income), click here to calculate your debt-to-income ratio. A debt-to-income ratio is determined based on dividing your monthly debt obligations by your monthly income. Your debt-to-income ratio is almost just as important as your FICO credit score.
- Length of Credit History (15% of Your FICO Credit Score – The longevity of your credit history is significant. A credit card issuer, mortgage lender, and/or small business lender will all expect you to have a certain number of years under your belt when it comes to borrowing money. A small business lender will look to see if you have credit cards, lines of credit, and mortgage loans in your name. This will give them a good idea of whether you can manage debt over time. A limited credit history could be the determining factor in getting denied for small business financing.
- New Credit (10% of Your FICO Credit Score) – Applying for too many types of credit in the previous six months before you apply for small business financing could result in a denial. If you have been diligently seeking financing and applying with many different sources, it will create a number of hard inquiries on your credit report. Too many hard inquiries (or too many new credit accounts) could impact your ability to get approved for small business financing. I strongly suggest that you avoid applying for other types of financing within 6 months of applying for small business loans and/or lines of credit.
- Credit Mix (10% of Your FICO Credit Score) – Managing different types of credit very well (over time) is impressive to small business lenders. They will want to see that you can manage a mortgage loan, auto loan, and a credit card, etc. Diversifying your credit accounts will increase your FICO credit score and improve your chances of obtaining small business financing.
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Work with an Expert to Obtain Small Business Financing
After you check your FICO credit score using NAV, the next step is working with an expert to obtain small business financing. For example, LenCred is an expert in helping entrepreneurs and small business owners obtain the financing they need to grow. If you apply for small business financing via LenCred, an Advisor will be assigned to you. The Advisor will review your personal credit history to determine whether or not you will qualify for small business financing. If you have bad credit, they will tell you what’s affecting your ability to get approved for small business financing. If you have a good credit score, they will tell you what small business financing options are available to you. If you’re interested in working with LenCred to apply for small business financing, click here to get started.
You’re FICO credit score is designed to give small business lenders a clear understanding of how well you manage debt. The majority of small business lenders use your FICO credit score to determine whether you qualify for small business financing. This is why it’s important that you know your FICO credit score before you apply for small business financing. Knowing your FICO credit score also means understanding what information is on your individual credit report. The information reported to a major credit bureau via your creditors is what’s on your individual credit report. That information determines your FICO credit score.
Your Consumer Credit History Influences Your FICO Credit Score
A good credit score is based on a good consumer credit history. The information a credit bureau reports on your consumer credit file is used to calculate your FICO credit score. Your FICO credit score is calculated based on five components. These components make up the FICO score model. The FICO score model uses your payment history, amounts owed, length of credit history, credit mix and new credit to calculate your FICO credit score. This is why the information reported by a major credit bureau to your consumer credit file is more important than your actual FICO credit score.
LenCred is an Expert in Helping Entrepreneurs & Small Business Owners Get Financing
LenCred helps entrepreneurs and small business owners with a good credit score and history obtain capital in the simplest way possible. When you have excellent credit, more options are available to you to finance your business. Entrepreneurs with a bad credit score will find it difficult (but not impossible) to obtain financing. We’re experts in helping entrepreneurs and small business owners with a good credit score obtain the financing that is right for them and at the right price. The better your credit score, the better interest rate and terms you will get from lenders. Many of our clients want the best interest rates and terms when borrowing. They need an expert to help them find the lenders who will give it to them. LenCred is that expert.
What Type of Financing Do You Offer for Entrepreneurs with a Good Credit Score?
Our specialization is unsecured business line of credit financing. We teach entrepreneurs and small business owners what it takes to get approved for this type of small business financing. We also work with them to help them obtain as much as $250,000 or more in unsecured business lines of credit. If you have a good score and established credit history, we can help you get an unsecured business line of credit fairly quickly. Contact us today to learn more.
What if You Have a Bad Credit Score?
Entrepreneurs with a bad credit score likely won’t qualify for the type of financing that an entrepreneur with excellent credit can. And when they do find financing that they qualify for, the interest rates and terms may not be favorable. While we can’t usually help entrepreneurs and small business owners with a bad credit score obtain an unsecured business line of credit, we can educate them on how to improve. Use the information to improve your credit score and apply for unsecured business lines of credit in the future.
Consulting with a Credit Repair Expert May Not Help
I usually don’t recommend consulting with a credit repair expert to people. This is because credit repair is a hit or miss. There is no guarantee that a credit repair expert will be able to help you get any negative accounts removed from your credit history. I prefer to tell people to educate themselves on the Fair Credit Reporting Act and use it to their benefit.
If you have negative accounts on your credit report and they are accurate, a credit repair expert won’t be able to help. Legally, you can only get negative accounts removed when they are outdated and/or inaccurate. Don’t let anyone tell you otherwise. There are so many unethical credit repair experts in the industry who will try to sell you a dream. If they do something illegal or unethical to remove an account from your credit report, chances are it will come back. And on top of that, it could get you into trouble.
Remember This Before You Hire a Credit Repair Expert
Be very mindful of you hire to help you repair your credit. Conduct a thorough background check and investigation on the company before you proceed. Also keep your expectations low, because like I said before, credit repair is a hit or miss. Lastly, but definitely not least, do not spend thousands of dollars on credit repair. A credit repair expert who charges $2,500 versus one who charges $500 means nothing. A higher price doesn’t mean they will do a better job. It just means you will pay one more than the other to do the exact same type of work.
Just about all credit repair experts use dispute letters that were create based on the Fair Credit Reporting Act to get negative accounts removed from your credit reports. Others may tell you to file police reports disputing that you opened the accounts (which is considered fraud). Either way, a credit repair service, in my professional opinion should cost more than $500.00.
Building (or Rebuilding) Your Credit Takes Time
When it comes to credit scores, there’s no way to legally beat the system. A good credit score is something that is built over time. You have to remember what makes up a credit score and do what it takes to ensure you keep a high one. Don’t beat yourself up over the fact that you can’t get small business financing right now because of a less than perfect history. Credit scores fluctuate for everyone all of the time. Chances are your credit score will go up again if you apply what I have discussed here.
4 Tips for Improving Your Personal Credit Score to Qualify for Small Business Financing
Damaging your personal credit history can be devastating to you if you plan on applying for a business loan to launch a new business Having a damaged personal credit history will surely stand in the way of you getting approved for small business loans as quickly as you would like. Although millions of people in America have seen their credit scores bounce back to the 700 and above range since the Great Recession, (according to Time Magazine), there’s still a high percentage of the population lagging behind (especially those who want to start businesses). Below I outline 4 tips that you can follow if you’re one of those people whose personal credit still hasn’t improved.
- Pay down your current debts – The best way to restore your personal credit history and increase your credit score is to begin paying off the accounts that have contributed to lowering your score in the first place. This may sound easier said than done (for some) but the best way to get any negative, derogatory, or delinquent accounts paid off is to pay them one at a time or little by little. The sooner you get started on it, the sooner you’ll be able to qualify for the small business loan needed to get your company up and running.
- Negotiate with your creditors – Paying off delinquent and/or derogatory accounts won’t cut it alone. This is because once the account is paid off, the creditor can still report it for up to 7+ years. Having a delinquent or derogatory account on your personal credit history for this long will surely stop you for being able to qualify for many forms of new credit. I suggest negotiating a “Pay for Delete” with your creditors, asking them to permanently remove the delinquent or derogatory account if you agree to pay it in full. This may take some skill and charm, but if you’re persuasive, it could work. (Click here to see an example of a “pay for delete” letter).
- Establish new, positive credit – The only way you can rebuild your credit history is if you establish new, positive credit. I suggest doing this in the simplest way possible, by obtaining a small secured credit card. Secured credit cards can be opened using your own money and can have limits of up to $500.00 (or more in some cases). A good example of a secured credit card would be Capital One’s Secured MasterCard.
- Separate your personal credit from your business credit – Once you have taken the time to pay off your debts and negotiate the removal of the derogatory or delinquent accounts from your personal credit reports, (and increased your credit score), you may be able to qualify for small business funding strictly using your improved personal credit history. Particularly, unsecured business lines of credit. According to the 2009 Small Business Credit Card Survey, lines of credit are a popular small business financing option (especially for new business owners).This type of funding can be fairly easy to obtain if you have a stellar personal credit history. Additionally, it can be obtained in the name of your business, thus enabling you to separate your personal credit history from your business credit history. This will further enable you to maintain the exceptional personal credit history you have built, all while still being able to utilize and build business credit.
