For most small business owners, the need to build and maintain a good personal credit score never goes away. Although it’s true that some lenders tend to weigh the value of your personal score higher than others (banks and other traditional lenders fall into this category) when they evaluate your business loan application, most lenders include a review of your personal credit score to determine your business’ creditworthiness.
This can be true for businesses with a few years under their belts as well as for those early-stage businesses looking for their first business loan. Nevertheless, in addition to a good personal credit score, small business owners also need to focus on building a strong business credit profile.
Your personal credit score is really a reflection of how you handle your personal credit obligations, and there are those who suggest it isn’t relevant to how your business handles its business credit obligations. Nevertheless, many lenders consider your personal credit score as one of the data points they consider when they review your business loan application, so it’s important to understand how your score is created, how it is considered when you apply for a loan, and what you can do to improve your score.
How is Your Personal Credit Score Calculated?
The early days of credit reporting were largely made up of local merchants working together to monitor the creditworthiness of their shared customers. With the passage of the Fair Credit Reporting Act in 1970, the Federal Government enacted standards to improve the quality of credit reporting.
In 1989, the FICO Score was introduced as the formula banks and other lenders started using to evaluate the creditworthiness of a potential consumer. Your FICO score is based upon data collected by the consumer credit bureaus. The three biggest are Experian, Transunion, and Equifax. All three of the major credit bureaus use the same basic scale from 300 to 850 to rank your credit, but the scores are rarely exactly the same.
That said, the fundamental formula used to calculate your FICO score is pretty straightforward and universally used:
35% Payment History: Late payments, bankruptcy, judgments, settlements, charge offs, repossessions, and liens will all reduce your score.
30% Amounts Owed: There are several specific metrics including debt to credit limit ratio, the number of accounts with balances, the amount owed across different types of accounts, and the amount paid down on installment loans.
15% Length of Credit History: The two metrics that matter most are the average age of the accounts on your report and the age of the oldest account. Because the score is trying to predict future creditworthiness based upon past performance, the longer (or older) the file is the better.
10% Type of Credit Used: Your credit score will benefit if you can demonstrate your ability to manage different types of credit—revolving, installment, and mortgage, for example.
10% New Credit: Every new “hard” enquiry on your credit has the potential to reduce your score. Shopping rates for a mortgage, an auto loan, or student loan will not typically hurt your score, but applying for credit cards or other revolving loans could reduce your score. According to Experian, these enquiries will likely be on your report for a couple of years, but have no impact on your score after the first year.
Thinking of Starting a Remote Business?
Of course there are more options, which we will share on our next blog, but the key is to start exploring now. Don’t just sit at home watching Netflix and letting this opportunity go by. If you have the dream, we can help you get the funding to take the next step.
It’s becoming all the rage now, with people looking for opportunities and creating new business ideas. If you are one of the bright new entrepreneurs looking to weather this storm by building a strong boat, we can help you find funding options that are right for you. Why wait another moment?
Financial restraints have been a complaint for many of the dreamers, limiting themselves to their immediate funds. There is an alternative. If you have the dreams and decent credit, Small Business Loans and No Doc Loans are available to you. Our goal is to provide you with the knowledge you need and the resources available to make your dream a reality. Give us a call – we have the education and the perspective to help you obtain the loans you need for your small business. Visit our website or give us a call to find out what financial backing is available to make your business soar!
Unsecured Finances has over 10 years in the consulting business! We specialized in educating and assisting clients on acquiring Unsecured Business Loans and Start-Up Business Specialty Loans including; Unsecured No Documentation (No-Doc Stated Income) Loans, Unsecured Business Loans, and Unsecured Start-Up Business Loans and Lines of Credit from $10,000 to $500,000 without Assets.
Apply on our website to find out if you qualify, or call today for a free consultation: 1-888-294-2584