Asking for your first loan as a business owner can be confusing. You’re going to have to dig up a lot of personal financial information, and that’s going to come as a surprise to some.
Even if it’s a corporation or LLC, the lender is going to look at your personal income, assets and credit. Small business loans also usually come with a personal guarantee. That means if your business fails, you’ll still have to pay the debt.
Like it or not, your credit score matters. And it can be a very detailed thing. This article explains exactly what goes into a credit score and gives tips for making that three-digit number better.
Personal Credit Report
For whatever reason, not every small business loan gets added to your credit report. But every small business loan will look at your personal credit report to see if you’re eligible.
Many first-time entrepreneurs bootstrap their own venture. That means they don’t borrow a dime to launch it, and by the time they do want a loan, the business is established and needs a capital injection to expand. By then, their personal credit can become a hindrance to how much they qualify for, if they’re approved at all.
When you’re a first-time entrepreneur, if your personal credit sucks, getting small business loans isn’t going to be easy. Which means if you haven’t launched yet, you might have to put things on hold a bit to get your credit in order, or consider a smaller launch than you were planning, just so you can get started at all.
It’s not just whether or not you get approved that’s decided by your credit score, it’s the interest rate and terms you’re approved for, too. And that factors into your monthly payment and total interest paid, which can be a huge number on a big loan.
Five Main Parts
You might not realize your score is actually based on your report. And if you didn’t know already, it’s comprised of five main parts.
The biggest part of your credit score, at 35%, is your payment history. This is just how you’ve paid on the accounts you’ve ever had, whether on time or late. It’s used by lenders as an indicator of your likelihood to pay in the future.
It includes revolving credit (lines and credit cards) and installment loans. So if you’ve ever filed for bankruptcy, or been sent to collections for an old debt, it’s going to show up, and affect your rating.
You may not realize the impact a late payment can have on your score. It all depends on how late it gets, how much is owed, how recently the account got past due, and how many times you’ve been late in the past.
After payment history, amounts owed makes up 30% of the pie. It considers the total debt you have, how many accounts carry a balance, installment balances against the total amount of loan borrowed, and the revolving balances compared to limits.
What’s your utilization ratio? It’s simply a comparison of how much you owe on the credit cards and lines you have, compared to their limits.
A common mistake by first time entrepreneurs is carrying a big balance on a credit card or line. Entrepreneurs often charge start-up costs, or make equipment purchases, with plastic. Sometimes they’re able to pay it off quickly, and sometimes they can’t. And if you don’t pay them off fast, the personal score is going to suffer.
Next up, length of credit history, which is the third largest slice of pie, accounts for 15% of the score. They’re going to look at the age of your oldest account, your newest one, the average age of all your accounts and how long it’s been since certain accounts were used.
The fourth largest part of your credit score is also a small one at just 10%, and it’s new credit. What they’re basically looking at when it comes to new credit is how many new accounts you’ve opened recently, how many hard inquiries you have, and also that established credit is better than multiple recent accounts. Too many hard inquiries on your report can lower it slightly as well. When you pull your own report though, it doesn’t affect your score.
Credit mix is the last 10%, and it’s the combination of types of accounts you have on your report. It can include credit cards, retail cards, installment loans, and mortgages.
A mixed credit report, with installment and revolving loans, shows an issuer you can handle both types of debt responsibly.
Five Tips to Get That Three-digit Number Higher
Having bad credit doesn’t mean you’re doomed to have it forever. Here are five tips to get that three-digit number higher.
The first is an important one: paying your monthly bills on time. Creditors report you as late once you’re 30 days or more past due for a payment.
It doesn’t matter whether it’s a credit card or a line, try to keep the balances low.
Part of your credit score comes from the length of your history, so keeping your oldest accounts open and your history long should always be a priority.
Because applying for new accounts, or the hard inquiries creditors run, shows up on your report, it’s recommended not to apply for several new ones at once, and to space them out when you can. It’ll keep your report low on hard inquiries.
Your credit report can have errors, or fraud, too. To check and make sure your report is clear, request it at annualcreditreport.com. During COVID-19, Experian, Equifax and TransUnion offered consumers a free credit report every week until April 20, 2022.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
