If you listen to Dave Ramsey’s radio show he will tell you that the best credit score is zero, or not to have one. He pays for everything in cash. Well, at least now that he is successful he does. The storyline is slightly different if you are using your credit score to secure a loan for your business. Depending upon many variables, including credit score, profitability, time in business, etc. your personal finances may be a factor depending upon the way you set up your business. The following facts and figures will give you insight into the current lending environment.
- The Small Business Administration reported a record $5,434,518,200 in 7(a) loans in 2018, up from $4,996,271,600 in 2017.
- Yet big banks approved only 27.8% of the loan applications they received in August.
- One likely reason is that the small business owner had a below-average credit score.
If the big banks are only giving you about a quarter of the money you need, where is the rest coming from? Small and medium-sized banks for one. According to the most recent Biz2Credit Small Business Lending Index, loan approval rates at small banks, buoyed by their activity in processing SBA loans that come with government backing, which minimizes risk, typically hover around 50%. This means that half of the businesses seeking small business financing are rejected. The Fintech industry is stepping in to try to fill in the difference, but a decent credit score still matters to them.
Personal Credit History: FICO scores are used by lenders, and they range from around 300 to 850. A good score generally is 700 or above and will allow you to qualify for credit at favorable terms. Any score over 760 is considered excellent, while anything below 650 is considered problematic. This is the personal side of the story.
Business Credit History: More than 7500 lenders nationwide also rely on the Small Business Scoring Service, or FICO SBSS score, to make lending decisions. The FICO score ranges from 0–300. The higher the score, the better, but lenders typically prefer a minimum score between 140 and 180. Credit ratings agencies, such as Equifax and D&B, typically examine the following factors:
- Company size and structure
- Industry risk
- Accounts-payable balances
- Timeliness of payments
- Credit utilization (the percentage of the company’s available credit currently in use)
- Time in business
- Bankruptcies, liens and judgments against a firm
So now that you know what lenders are looking for in terms of credit score, how can you improve the score you have?
Review your Business Credit Reports Often: The main reason to request your credit report is to check for errors. Perhaps the credit agency has not removed the black mark of a bankruptcy that happened during the recession a decade ago.
Always pay bills on time, even if you can’t pay in full: Late or missed payments are detrimental to maintaining a good credit score. Be sure to pay bills on time. Fortunately, recent payment history counts more than older credit problems, and negative issues will eventually fade as time passes.
Incorporate your Business: Whether it is an S-Corp or LLC, this will provide protection from personal liability and give your business more legitimacy. Once you have incorporated your business, set up utility bills, like phone, electric, etc. in the company’s name and prepay them if you can.