Your personal credit score is important for your overall health.
In my role as a financial adviser to small business owners I seldom ask my clients “ How are you?”
This traditional greeting has been replaced with a more meaningful greeting:
“How is your credit,” or “What is your FICO score?”
The client’s response allows me to evaluate realistic options for obtaining the capital needed for business expansion. A FICO score of 680 will illicit interest and command a favorable interest rate from an institutional lender.
A 680 score doesn’t assure the client that the loan is approved, but it does allow the lender the opportunity to start the loan process. Loan requests with credit scores below the 680 norm are attractive to lenders who do not evaluate credit risk, but charge much higher rates to compensate for the increased risk.
I advise all business owners seeking to access funds for business growth to work on their personal credit before they approach institutional lenders.
You can pull your personal FICO score from one of the three bureaus, Experian, Equifax or TransUnion, without impacting your credit rating. This is referred to as a self pull.
There are five criteria than will affect your Fico Score:
- Delinquencies - late payments on outstanding debt
- Debt Ratio – exceeding 35% of your available credit
- Credit Mix - a mix of types of debt is favorable – these include installment loans, mortgages, and credit cards
- The Age of the Credit file - long term accounts are favorable
# of Recent Credit Inquires – too many pulls will have a negative short term impact on the score.
Components of a FICO Credit Score
Try to avoid using your personal credit cards for your business.
Institutional lenders do not want to provide loans to repay personal debt, even if the debt was used for the business. I advise all my clients to separate their business loans from their personal loans, and if they intend to seek capital for business expansion, minimize the use of credit card debt for personal use.
You will have to find personal funds to repay credit card debt and exceeding the 35% limit will immediately lower a FICO score. And credit card debt, although readily available, is costly. Easy access is usually more expensive than institutional debt.
Another word of caution to those business owners seeking capital.
If there are financial issues such as a previous bankruptcy or a short- sale or a loan modification, I advise you to provide this information to a lender before you start the loan process. Even if the problem did not appear on your credit report, it may appear on other reports that the lender might access before a loan closing.
It is better to disclose the issue at the beginning of the process than have the lender learn about it indirectly from another resource later in the loan approval process. Some lenders have more flexibility than others, and therefore disclosure is preferable.
Your personal credit score is important for your overall health. A score of 680 or higher will remove a great deal of the stress from your daily routine.
About the author
Marjorie Weber has been educating entrepreneurs and guiding them in their search for capital for the past 16 years: combining business training programs with one-on-one mentoring. Marj is currently the executive director of Primed2Grow, a Miami based consultantcy. Most recently Maj was a financial advisor for Florida SBDC at FIU. She was Chair of SCORE Miami Dade from 2010 to 2014. She also serves as an advisor to the Goldman Sachs 10,000 Small Business Program and the SBA Emerging Leaders Program and provides training for Veterans seeking an entrepreneurial path upon retirement from the service. She has facilitated workshops under the auspices of Miami Bayside Foundation, Little Haiti Cultural Center and .local banks. She commenced her career as a real estate investment banker in New York and Miami..She uses these long term relationships to assist her clients in accessing capital. She knows both the process and the people and has assisted in providing financing for hundreds of businesses in Miami Dade.