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Personal Credit Scores & Business Loans - Everything You Need To Know

Pre-Qualify for a Business Loan

Credit scoring is a mechanism that is widely used by lenders and creditors to help them decide whether or not to make a loan or extend credit and potentially the rate and terms of the credit facility. A credit score can be a personal credit score (based upon the individuals personal credit criteria) or a business credit score (based upon factors relevant to a business credit profile). It is important to know that your personal credit score is also an important factor in determining your business credit score and that lenders will look at both scores when evaluating a loan request.

What is a Personal Credit Score?

A personal credit score is different than a credit report. Your personal credit score is a numerical score which is primarily based upon information generated from your credit report. Fair Isaacs Corporation (FICO) is the most popular credit scoring company generating what is commonly known as the FICO score. Fair Isaacs Corporation is a New York Stock Exchange Company founded in 1956 by Earl Isaac and Bill Fair. FICO scores range from 300 (at the low end indicating poor credit risk) to 850 at the high end (indicating a strong credit rating). The FICO score is generated using credit reports, generally from one or more of the three major credit reporting agencies or credit bureaus, Equifax, Experian and TransUnion. The score may be slightly different depending upon which agency report is used and when it was pulled. The FICO score is used in over 90% of all small business lending decisions. The FICO personal credit score is different from the FICO SBSS score, the leading score used in business credit decisions. The SBSS score is used by both business lenders and the U.S. Small Business Administration in pre-screening all SBA Loans under $350,000 (you need a SBSS score of 140).

You can get an estimate of your score range using the FICO Score Estimator. The estimator is based upon information you input and not credit report data. It is important to note that certain credit inquiries can affect your credit score. A hard inquiry (such as inquiries made by banks when applying for loans or credit cards) can lower your credit score by a few points. A soft inquiry (checking your own credit score, pre-approved credit card offers and employer background checks) should not impact your score

Understanding your Credit Report

Personal credit reports contain basic information about you such as name, address, employment and detailed information about your current and historical credit usage and performance. The information is based upon reports to the credit bureaus by vendors, credit card companies, mortgage and other lenders as well as public records. Credit reports can be quite voluminous and will generally include some or all of the following:

  • Name – the report will contain your name and possibly different versions (nickname or misspellings).
  • Address – this could include your current address and other addresses you’ve lived at. You should make sure that your name and address are accurate so that another person’s history is not being included in your report.
  • Your Employer might be included
  • Credit cards, including outstanding balances and credit limits
  • Loans, including mortgage loans, car loans, personal loans, installment loans
  • Credit applications that have been made recently as well as open and closed accounts and cancelled credit cards
  • Payment history on all accounts (e.g. current, late payments etc.)
  • Public records such as bankruptcies, foreclosures, pending lawsuits
  • Collection accounts

It is important to check your credit reports for accuracy since they are an extremely important element in generating your credit score and they are utilized by lenders to make credit decisions. You are entitled to obtain a copy of your credit report from all three credit bureaus, free of charge, once a year. If you are applying for a business loan or thinking about it, you should look at your credit reports before you proceed so that you can correct any errors or explain any derogatory items. You can obtain the reports at www.annualcreditreport.com. The credit report will not have a credit score attached.

Factors that are used to determine your FICO credit score

According to FICO generally (1) 35% of your score is based upon your payment history (do you pay your bills on time or do you have late pays, bankruptcies, foreclosures, judgments, liens and lawsuits seriously impact credit scores), (2) 30% of your score is based upon the amounts you owe (FICO considers the total amounts you owe as well as how much of your credit lines you use and how you pay down your loans), (3) 15% is based upon the length of your credit history, (4) 10% is based upon new credit (opening new credit accounts within a short period of time and as well as credit inquiries may lower your score) and (5) 10% is based upon the types of credit used (having different types of accounts e.g. credit cards, mortgage, loans retail accounts etc., and managing them well will help your score). The importance of any one of these factors may vary based upon information in your credit report. For example you must have at least one account that has been opened for six months or more to generate a FICO score. Obviously if that is all you have then the other factors may be given more or less weight than set forth above.

Try the free Fundability App and see how fundable you are in the eyes of business lenders.

What Your Credit Score Means to A Business Lender

Business Lenders set their own risk standards and these may vary from lender to lender and also may vary by loan size, loan type and other credit factors in addition to the score. According to ScoreInfo.org, created by FICO, the following are general guidelines for understanding your score:

FICO Credit Score Range

  • 760 or higher – Exceptional borrower, well above average
  • 725-759 Very Good – above average, dependable borrower
  • 660-724 Good approximate average for U.S. consumers
  • 560-659 Not Good Below average
  • Below 560 Poor Well below average, potentially risky borrower

Improve Your Credit Score

The first step is to review your credit report to determine which of the five factors listed above may contain derogatory items. It will take time to improve your score. Assuming there is no mistake or misinformation (if there is you should contact the credit bureau to dispute the items), you should begin address each factor. Since 35% of your score may be based upon payment history, if you have past due accounts and late payments you need to begin to catch up on past due accounts and pay others on time. Moving debt from one account or credit card to another will not help. If you have negative items that are in the public record such as bankruptcies and foreclosures, they will remain on your report for 7-10 years, although the negative effect will diminish over time. The amounts you owe account for 30% of your score so lowering these amounts should improve your score over time. FICO will evaluate the outstanding balances on your accounts to your credit limits and if they are too high that will hurt your score. For example if you are close to the maximum limit on your credit cards, this will hurt your score. Since length of your credit history accounts for up to 15% of your score, the longer you have accounts that you pay on time the better your score will be. If you open too many new accounts or have too many hard inquiries within a short period of time, this will hurt your score. Inquiries account for 10% as does the type of credit accounts you have. You do not want to have too many credit cards, but a reasonable number of different types of facilities that you manage well can be helpful (such as a mortgage, auto loan and credit card). If you have no credit history you can begin to develop a positive score by opening a small number of accounts and managing them responsibly.

Apply for a Business Loan

Securing a business loan depends largely upon the size and purpose of the loan, but other considerations such as your personal and business credit score and collateral can play a role. Most business financing requires comprehensive information on the business and the borrower - the loan application and checklist. This includes financial and tax records for the center, a detailed business plan and loan plan, projections of expected earnings, personal financial and tax records as well as resumes for all purchasing parties, and a listing of all the center's assets and relevant documents detailing any proposed transactions involving the daycare center.

You can apply for a business loan with one of the 5,000 lenders on BoeFly. A single loan request through BoeFly is the most efficient way to seek a loan. Many individual banks or lenders can start the loan process, but BoeFly helps daycare center owners by creating lender competition for their business, presenting an array of funding options, pricing and terms.

Ready to start? Contact 1-800-277-3158 for a free consultation.