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There are 125 factors that affect the fundability of your business. Personal credit is one of them. Since it impacts the fundability of your business, personal credit impacts business operations.
Fundability is the obvious one. This is the ability of your business to get funding. If you don’t have funding for your business, it can’t operate.
However, there are more subtle effects as well. For example, if you are worried about your personal finances, business decisions can suffer. You may be more tempted to make decisions based on trying to control personal issues, rather than what is best for the business. Personal financial issues can distract you from running your business well.
Bad credit doesn’t have to be the downfall of your business. Some factors are out of your control. Others are not. The key is to know what is causing the problem, fix what you can, and mitigate the rest.
One way to mitigate personal bad credit and its negative impact on business operations is to build strong business credit. It can also help to know which types of funding rely most heavily on the credit score from your personal report.
Until you improve your credit, you may not qualify for a traditional business loan. However, there are other options.
While you are working on improving your credit score, you don’t have to be stuck without funding. You just have to find those types of funding that you can qualify to get with a less than ideal credit score.
If you have open invoices and offer credit to customers in some form, then you can get paid faster with invoice factoring. Usually, this involves invoices with net terms, such as net 30, 60, or 90. You turn those invoices over to a factoring company, and they give you an agreed upon percentage of the total of the invoices. You get this amount of money immediately, and when your customer pays, the factoring company keeps their agreed upon fee while sending the balance to you.
A merchant cash advance (MCA) technically isn’t a loan. Rather, it is a cash advance based upon the credit card sales of a business. A small business can apply for an MCA, and have an advance deposited into its account fairly quickly. This is ideal for business owners who accept credit cards and are looking for fast and easy business financing.
A lender will review 3 months of bank and merchant account statements, looking for consistent deposits. They’ll also verify revenue of $50,000 or higher per year and a time in business of 6 months or longer. A lot of Non-Sufficient-Funds (NSFs) showing on your bank statements will likely be a deal breaker, as will excessive chargebacks on merchant statements.
Basically, they want to see that you manage your bank and merchant accounts responsibly. Of course, a decent number of consistent credit card transaction deposits each month is important for this type of financing as well.
Fundbox offers a revolving line of credit for up to $100,000 and will auto debit your weekly payment from your bank account. They connect directly to your online accounting software. You pay in equal installments over the course of a 12 or 24 week plan.
You do need to have a 600+ personal FICO score and $100,000+ in annual revenue, and you must have a business checking account. Ideally, you will also have 6 months in business or more.
If you have bad credit, it needs to be fixed. How do you do that? The short answer is, pay your bills. Still, if you already have bad credit, it will take some time for that to make a difference.
Also, make sure your credit report is current and free of mistakes. YIn fact, you can get a free copy of your credit report annually.
The three main reporting agencies when it comes to personal credit are:
You can get a free report from all three each year. How?
Per FTC.Gov:
“You’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228. You will need to provide your name, address, social security number, and date of birth to verify your identity.”
Once you get your report, read it carefully and make certain all of your information is correct. Contact the appropriate credit agency in their preferred manner if you find a mistake. Each agency has its own procedures for corrections. Generally, you can find them on their website. Online options for disputes are more common now due to the pandemic.
These steps will help you get a jump on improving your credit score.
In addition to a free copy of your credit report each year, there are free monitoring services that will give you an updated credit score each month. New information that has been posted to your credit report is available with some of these services. As a bonus, some will offer suggestions as to which factors are dragging down your score. Some of these services even provide real-time credit updates for a fee.
Of course, a good FICO score will impact business operations as well. Business lenders will generally look at personal credit when you apply. Consequently, good credit will not only help you get approvals, but better rates and terms also.
Maintaining good credit is important for a number of reasons. Keeping your business running is one of them.
The post What You Need to Know About How Personal Credit Impacts Business Operations appeared first on Credit Suite.
It makes sense that, if you do not separate your business credit from your personal credit, you could run into issues. Most get that if they fund their business with their personal credit, their personal finances could suffer. But, did you know that even if you have separated everything beautifully, the reverse can still be true? Here are 3 ways personal financing can affect your ability to get funding for your business.
Some business funding options consider your personal credit score no matter what. For example, all traditional loans, SBA loans, and even the Credit Line Hybrid focus on personal credit score. Generally, they want to see a personal score above 650, though there are exceptions. The issue goes beyond this however.
The number one factor that affects personal credit is paying on time. However, some other factors that can affect your personal credit score include:
This last point is important. It includes everything from credit card debt to personal financing for auto loans and mortgages. If you max out your limits on everything without paying it down significantly, your personal credit score will be negatively impacted. All of this means, you could be making all payments on time and still run into issues.
It’s true. Some business credit reporting agencies take your personal credit into account. They use your personal credit in the calculation of the business credit score they release to lenders. This means if your personal credit score is bad, your business credit score could suffer.
Experian is different from the other two main business credit reporting agencies in one very important way. Of course, business credit is credit in a business’s name. It depends on how well a company can pay its bills. Yet, Experian uses both consumer and business credit information to gauge risk. They find a blended score is more accurate and predictive.
This score is becoming increasingly common and it’s a lot trickier. FICO SBSS stands for FICO Liquid Credit Small Business Scoring Service. Unlike your personal FICO, the SBSS reports on a scale of 0 to 300. The higher the score the better, and most lenders demand a score of at least 160.
The scoring model for this score is not the same as other business credit scoring models. It uses your business and personal credit scores, but it does so much differently than Experian.
The formula for calculations is proprietary and well-guarded by FICO. They do not make the information public. Unlike the other business credit reporting agencies, you cannot request a copy of your report or see your score. Here’s why. Surprisingly, this score can actually vary from lender to lender. That’s right, two different lenders can get two different scores for your business from FICO SBSS at the same time.
Here’s how that works. Lenders can ask for certain factors in the score to carry more weight than others. Your score can vary depending on how a lender weighs each factor. One lender may put more weight on your personal credit score or your business credit. Meanwhile, another may choose to weigh annual revenue as more important than payment history. It is their choice.
FICO searches business credit information from business credit agencies. This includes D&B, Experian, and Equifax. They use this information in the calculation of your score. So, your score with these bureaus affects your FICO SBSS.
The only way to ensure that your personal credit doesn’t impact your business credit in a negative way is to keep your personal credit in good order. This is because you really can never know which factors the lender is going to weigh more or less for that matter.
Because some types of funding require a strong personal credit score, you may need to use a guarantor to get access. This includes some funding types that can help you build business credit, like the Credit Suite Credit Line Hybrid.
A credit line hybrid is a form of unsecured funding. Our credit line hybrid even works for startups, and you can get a better interest rate than a secured loan. It reports to business CRAs, but you need a FICO score of at least 680 to qualify.
However, if your personal FICO isn’t that great, you can use a guarantor with good credit to get approval. It’s no-doc financing, meaning you do not have to turn in any financial documents. Using a guarantor could be worth it if you need funding quickly.
Business lending, at its core, is affected by the Fundability of your business. There are 4 core factors that affect business Fundability, and each of these factors is made up of a number of principles. Personal financial statements and other data bureaus are included in these factors.
Some lenders will ask for personal financial information no matter what. Others may only look at them if the business is not considered creditworthy on its own. When it comes to personal financial statements, lenders are usually looking primarily at tax returns. It’s best to have a tax professional prepare them. Other information lenders may ask for include check stubs and bank statements, among other things.
There are other agencies that hold information related to your personal finances as well. ChexSystems is one example. They track bad check activity, and their report makes a difference when it comes to your bank score. If you have too many bad checks, you will not be able to open a business bank account. That, in turn, will cause serious fundability issues.
LexisNexis and the Small Business Finance Exchange also fall into this “other bureaus” category. They can have all sorts of information on you, like:
While these bureaus do not directly generate credit reports, they do share information with certain credit agencies. They then use this information for their reporting.
This means personal finance information they hold can affect the fundability of your business, and thus your business lending options.
Whether it’s credit card debt, a mortgage, or just how you handle your personal bank account, your personal finance management can affect your ability to fund your business.
You cannot change that entirely. Still, you can limit the extent to which this is true. Separating your business from yourself and building a strong business credit score is the best way. Lenders will be able to depend less on the personal financing aspects of your creditworthiness, and focus more on the fundability of the business itself.
The post 3 Surprising Ways Personal Financing Affects Business Funding appeared first on Credit Suite.
Twitter announced Sunday that it had permanently suspended the personal account of Rep. Marjorie Taylor Greene, R-Ga., over alleged COVID-19 “misinformation.”
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If you’re a small business owner, don’t assume your business credit is separate from your personal. If you apply for a loan, lenders will consider it on your personal credit, not your business credit. Your business credit score is considered on its own only if your company generates millions in annual income. Otherwise, assume that your personal credit score will matter.
Solid personal credit is a necessity. The need to build and maintain it never goes away for most small company owners.
Some lenders (like banks) place more importance on personal scores. This is for checking business loan applications.
To establish your business’ creditworthiness, most lenders first analyze your personal credit score. This happens with organizations in operation for only a few years. It also happens with businesses seeking their first business loan.
So, small business owners must focus on creating a solid business credit profile. This is along with building a good personal credit score.
Here are the main variations between company personal credit scores:
When reviewing creditworthiness for a business loan, most lenders check personal credit history.
But some lenders will give your personal credit score less weight than others. Lenders may pay less attention to a poor personal credit score if you already have a track record of solid business credit.
Your personal credit will matter more for a business loan when any (or all) of the following are true:
You should assume banks have strict lending rules and often aren’t too flexible. But private lenders offer financial help. It’s in the form of business loans with low credit requirements. They provide funds considering a business owners’ personal score. This is even if the business score is low. Here, conventional lenders may check personal credit scores to offer you a business loan with flexible terms.
If your business score does not have enough info for lenders to check credibility, they will place a higher value on personal scores.
This can be the case with sole proprietorships or small businesses with few employees. Here, it may be hard for a conventional lender to distinguish between your business credit report and personal credit reports.
Even if you have a few old negative entries on your personal credit report, getting a business loan shouldn’t be tough. If your business’s credit history is excellent, then it shouldn’t be a problem.
But too many negative items on your personal credit history may damage your score. A low personal credit score is something a lender will notice and consider as a risk.
Your personal credit score reflects how you manage your personal credit liabilities. But some may argue that your personal credit score has nothing to do with how your business operates its business credit liabilities.
As a business owner, understand how your credit score is calculated, and how it’s used when you apply for a credit. And understand what you should do to improve it.
The Federal Government improved credit reporting quality with the Fair Credit Reporting Act in 1970.
The consumer credit bureaus collect information from a consumer’s credit profiles to create FICO scores. Experian, Transunion, and Equifax are the three largest credit bureaus. These three major credit bureaus maintain the same basic formula to rate your credit. A personal credit score ranges from 300 to 850 and is rarely identical.
They calculate your FICO score using this basic, widely used formula:
Late payments, judgments, and bankruptcies are problematic. So are debt settlements, repossessions, charge-offs, and liens in your credit report. They will lower your personal credit score.
Your personal credit score also depends on your debt-to-credit limit ratio. And it depends on the number of credit accounts, the total amount of credit balances, and the amount paid off on installment loans.
Your credit history plays an integral part in building your credit score. The average age of the accounts and the length of your oldest credit account are the two most important criteria. The longer (or older) the file is, the better. This is because the score tries to forecast future creditworthiness based on past credit history.
Having different types of credit shows your ability to handle many credit accounts. These types include revolving, installment, and mortgage credit. It will definitely have a positive impact on your credit score.
Each new “hard” inquiry on your credit report may have an adverse effect and may lower your score by 10%. Per Experian, these inquiries may stay on your report for a few years. But they will have no impact on your credit score after the initial year.
Credit bureaus collect personal information like your name, date of birth, location, occupation, and more. They’ll also prepare a list of information that the creditors provide. Other information, like judgments or bankruptcy, will appear on your credit reports. It becomes part of your personal credit score. When you apply for new credit, your creditor will see all that info in your credit report and check your score.
If you find any inaccurate data reported, the credit bureaus have procedures in place to correct verifiable mistakes. Amendments to the Fair Credit Reporting Act in 1996 allow you to put a 100-word statement on any report that includes an item you dispute.
A range of factors can drive a bad credit score, including a divorce, severe illness, or loss of employment. This allows you to ensure that potential creditors are aware of the information.
Here’s what a potential creditor sees when they look at your score:
You should expect lenders to treat you like a king! With a credit score above 800, you can choose the best credit alternatives for your needs, and the best interest rates, from any lender you choose..
If you have a credit score inside this range, lenders will treat you as a low-risk borrower. You can get a loan from almost any big lender with affordable rates. With this credit score, you can choose the best business loan that fits your business needs.
This is a good score, and many people in the United States fall into this category. With this score, a borrower can hope to have more choices and approvals from various lenders.
This is a score that indicates a significant level of risk. A small business loan is feasible, but the interest rates will often be higher. If your score is in this range, you will have fewer possibilities than those with a higher level.
Most conventional lenders will not consider borrowers in this group for a small business loan. A personal credit score of 660 is the lowest that the SBA will typically consider.
Borrowers with this credit score can access some credit. But it’s considered a high-risk credit score. So there will likely be fewer possibilities and higher interest rates. If your score falls in this range and you want to get a business loan, consider offering some collateral.
There is no simple solution to fix your personal credit score issues. But that doesn’t imply you can’t increase your score with time and effort. Here are six strategies to improve your personal credit score:
You are entitled to get a free credit report once a year from annualcreditreport.com. You can get your credit report as many times as you want from all three major credit reporting agencies. These bureaus provide credit monitoring services for an affordable fee. Get your report from them and analyze it properly.
This may sound oversimplified, but it’s critical. Resist the urge to use all your credit limits all the time. This is so even if you pay off the total outstanding debt balance every month through credit card debt consolidation. Using all the available credit further can damage your credit score.
Keep credit usage to roughly 15% of your available credit limit to increase your credit score.
This is most likely the best and most successful strategy to improve your score. How fast you make payments and satisfy your liabilities makes up 35% of your score. A single late payment can significantly reduce your credit score.
Applying for unnecessary credit reduces your credit score. So if you’re attempting to raise your score, it’s not a good idea.
Transferring balances from one credit card to another does not affect your credit score. But, it’s generally known as a wrong financial move that could harm your personal credit. Frequently transferring balances can put a bad impression on your future creditors.
Improving your credit score requires strong determination and hard work. Your constant effort over six months or even a year can make a significant difference. But missing a payment or two will almost certainly lower your credit score fast.
About the Author:
Lyle Solomon has considerable litigation experience. He has substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California. He now serves as a principal attorney for the Oak View Law Group in California.
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