Tips Guides Resources

The success or failure of a small business could very well rest on the business owners’ credit scores, especially with the failure of most businesses in the first six months of the business. It is important that business owners are aware of FICO’s many laws and formulas used to establish credit for their customers. This will help business owners make informed decisions about how they manage and deal with their business in order to maximize their chances for a good credit. A good credit score can make or break the success of your business. Here is a guide to how FICO reviews your business and determines your credit score.

Payment history: The history of how well a company pays off its debts is one important thing that FICO looks at when determining a company’s credit. In fact, about 35% of a company’s credit score is determine by this. Payment history analyzes how often debts are incurred, how quickly they are paid back, and whether or not payments are made on time. Of course having some debt is ok for your credit report, as long as you are making timely payments and are responsible about incurring debts.

Amount owed: Another important thing that FICO looks at are the actual amount your company owes in debt. This is important because a company with very major debts are less likely to pay them back and have good credit that a company with appropriate good debts. Make sure that you and your business do not have excessive debts that may look suspicious or caution FICO. This can account for up to 30% of your credit score.

Length of credit: The amount of time debts are outstanding is important to establishing a credit score as well. This is because the longer a debt remains outstanding, or the longer a credit, the less likely it is to be good for your credit score. In fact, the longer you go without paying off a debt the worse it is on your credit. However, a long history of good debt occurrences and reasonable pay-back time frames is a great way to establish good credit. This number actually accounts for around 15% of your credit score.

New credit: The type of credit you have can also greatly affect your credit score. New credit can sometimes be a cause for concern, however as long as it is not terribly excessive or unexplainable. It is also important to maintain a strong debt to equity ratio to demonstrate to credit reporters that you are not in financial trouble. This accounts for around 10% of your credit score.

Type of credit: The type of credit a business has is also very important. For example, if you have a line of credit with your bank, a line of credit with a major office supplier, and a seldom-used credit card account for overdraft protection are good types of credit. However, if you use a line of credit for overdraft protection and it has large outstanding sums on it, this is not a responsible type of credit. Type of credit usually comes out to account for around 10% of your credit score.

No matter what your credit score, it is important for you and your small business that you understand what goes into it.

Scott Letourneau is the CEO of Fast Business Credit, Inc. and has a valuable free guide to help business owners get access to capital plus a new program to help business owners understand the entire process from bank lending to understanding their business credit score! Go to our Business Credit Program page for powerful details!

Many businesses fail because they are unable to access the capital that they need to survive, particularly in the first five years of establishment when banks view them as riskier because of their age. This is also when the vast majority of businesses fail. By being aware of the factors that are weighed before lending money, you can better prepare your business to successfully attain the credit needed to not just survive, but thrive. Your personal credit score and revolving debt will be an integral part of this process, but there is more involved than just your individual financial history.

Lenders will look at the risk your business’s industry poses. Every industry is assigned an SIC code. This indicates a certain level of risk to the lender. Perhaps bakeries fare better in their first ten years, have relatively low operating costs, and good overall success rates, whereas hair salons have a higher failure rate and overhead costs. The bakery industry’s SIC would reflect a lower risk than the salon’s, and so on. This translates directly into the amount banks will lend you. The lower your industry’s risk, the more credit lenders will approve you for. The variance between amounts that lenders will give a low risk business an a high risk business are not great, however. Having a very low risk SIC industry code may only gain you five additional percentage points of your annual gross sales in your credit line, meaning if the lender would provide a high risk industry with a loan equal to ten percent of their annual gross sales, a low risk business might only get a loan equal to fifteen percent of their gross annual sales. Thus, the amount is not huge, but still is significant in the final total your business will receive.

Lenders will also determine how much to lend your business based on how long it has been established. This figure will mean the amount of time in business under current management. The general standard is six months minimum, although some banks will require one year in business. These procedures vary greatly depending on the lender; however, some will give new businesses a business credit card immediately upon opening an account with them. The business line of credit, however, will usually be withheld until the business has been going for six months. New business owners should also keep in mind to request credit lines under $50,000 when applying for their first line of credit after six months, as most lenders will automatically reject any larger requests until the business is more established.

Lastly, lenders will logically want to determine if your business has been profitable. They will examine your business revenues to determine this. This makes sense on the part of the lenders, due to their need to assess risk. A business that is already succeeding is a significantly lower risk than one that is faring poorly, or is so new that they have no revenues to speak of at all. For these brand new businesses, again, it is likely that they will be required to get by with just a business credit card for the first six months. Once revenues have been established, then it is appropriate to seek out a line of credit.

There are ways around these guidelines. Exceptions are known to have been made for those with extremely strong personal credit scores, very low revolving debt, and a number of other factors that must fall into place favorably. For the vast majority of business owners, however, it will be a combination of personal fiscal history, these three factors, and the required waiting period until they are able to access the larger credit lines their business needs.

Scott Letourneau is the CEO of Fast Business Credit, Inc. and has a valuable free guide to help business owners get access to capital plus a new program to help business owners understand business credit! Go to our Business Credit Program page for powerful details!

Many business owners are shocked to find that their personal finances have such a large impact on their business’s ability to access credit. Revolving credit, in particular, can have an unexpected affect on any individual’s ability to access new lines of credit or business credit cards for their business. In fact, your individual FICO score can factor up to fifty percent into a lender’s decision to approve your business for credit or not.

In order to understand how revolving debt impacts your business’s access to credit, it is important first to have a good understanding of what revolving credit is and how it works.

Revolving debt includes all of an individual’s personal credit cards, department store cards, and any home equity lines of credit they may have out. Revolving debt is the ratio between how much credit is available to the individual from these three sources and how much is actually owed. This is a reflection of your financial state. If an individual has all lines of credit maxed out or nearly so, it will appear that something is going on in the person’s financial life, or that they are desperate for more capital, not what a lender wants to see when deciding to grant you access to more money. For example, if an individual has a total of 10,000 dollars available to them in all his credit cards, department store cards, and home equity lines of credit, but has a total balance owed on all three of only 4,000 dollars, that would be a forty percent ratio. Anything under fifty percent is generally good.

After incorporation is a critical time for a business to go to the next level, and this usually requires more capital in the form of loans, credit cards, or other lines of credit. It is exactly at this time when your personal revolving debt comes into play so crucially for your newly incorporated business. Your numerical FICO score will play a large role as well. It is usually ideal to have at least a score of 680 at this time, but this requirement will vary depending on the type of credit being requested. The requirements to finance a mortgage on a new property, for instance, will be vastly different than the requirements for a new business credit card.

Particularly in the case of a new business, your personal finances will be key. This is because as a newly established business, the lender has little to examine other than your personal finances. Managing your personal debt is one very important way to ensure that lenders will have a positive outlook on giving your business access to credit, but it is not the only factor involved. Having no credit cards, or only one or two, is not ideal. Lenders will want to see a fairly diverse and long credit history, so having one or two long-established accounts is great, but three or four total open lines is a much better number. Also, if you have bankruptcies, judgments against you, this will likely weigh into the bank’s decision. Make sure your personal finances are in great shape before you risk the success of your business on them.

Scott Letourneau is the CEO of Fast Business Credit, Inc. and has a valuable free guide to help business owners get access to capital plus a new program to help business owners understand business credit! Go to our Business Credit Program page for powerful details!

Credit scores have long been determined by a nearly universal formula known as the FICO model. This model, owned by Fair Isaac, is used by over 80% of the major banks in the US, and is the familiar 300-850 credit ranking that consumers are familiar with.

The credit bureaus have put out their own credit scoring formula to rival the FICO formula. This newer method of scoring is known as VantageScore, and is said by the credit bureaus to be a better assessment of risk, and just as good as FICO’s system at stabilizing differing data from the three credit bureaus.

There are two ways in which the bureaus believe that their method is a better risk assessment than FICO’s. VantageScore takes a different approach to some borrowers that the bureaus feel pose more of a risk than the FICO model accounts for. These are newer or “younger” borrowers, those with their oldest account open for several months to a year or two, and “lean” borrowers, who have few accounts to gather information from. The bureaus have long complained to Fair Isaac that these borrowers’ habits have not been well established enough to warrant even the best of them receiving a top credit score. They claim that their model does a better job assessing the risk of young and lean borrowers. What this may translate to in practice is credit becoming significantly less accessible to these consumers.

The second way in which the bureaus believe VantageScore better assesses risk is in separating good from bad risk. VantageScore has even advertised the importance it places on putting more bad risk accounts, or even possible bad risk accounts, into the very lowest score ranges possible. What this may mean in practice is less concern about a contested mark on an individual’s credit report or less tolerance overall of minor infractions, and more individuals being placed into the “bad egg” category, perhaps somewhat hastily. This will remain to be seen once the system has been in place for a measurable amount of time.

Perhaps the true test of the new system’s effectiveness will be in its ability to give consistent scores to borrowers regardless of which credit reporting bureau is providing the information. The three credit bureaus, Equifax, TransUnion, and Experian, all accumulate their information independent of one another. There may be accounts that show up on two of the bureau’s reports on the same individual, and not on the third company’s. There may be a contested charge that two companies agree to remove, while the third refuses. There are different policies and networks in place that acquire the information of consumers. Thus, the challenge and success of FICO has been in their ability to provide a relatively stable credit rating for consumers regardless of which set of information they are getting; to weed through the discrepancies, essentially. If VantageScore is able to do this, it will have a greater chance of being accepted by lenders. The bureaus claim that it does just that, but as of yet, it has not been tested against FICO or in any significant way. This will likely be the test of whether or not VantageScore has the staying power to give FICO a run for its money and be a permanent fixture on the credit scene.

Scott Letourneau is the CEO of Fast Business Credit, Inc. and has a valuable free guide to help business owners get access to capital plus a new program to help business owners understand the new VantageScore system! Go to our Business Credit Program page for powerful details!

Small businesses are extremely important to our culture and our economy. In fact, small businesses make up a very significant portion of our economy. They thrive on local business and give life to the monetary heartbeat of America. The financial success of America’s small businesses lies heavily on their ability to attain credit in order to maintain their business.

Recently, FICO has changed some of its rules for the credit approval systems for these businesses. It is important for business owners to understand these changes to the credit score formula. These types of changes may affect some of the decisions business owners make for the success of their business and it is important to pay close attention to these changes.

FICO has announced that authorized users on credit accounts will not have that credit account factored into their credit scores. In other words, credit determine by a credit account for the primary user on the account. This means several things for a small business owner as a credit holder.

Loss of credit: Small business owners should be aware that their credit scores might likely drop because of this change. They are essentially losing credit because they will no longer get credit improvement for being an authorized user on a successfully managed credit account. Business owners should look into their credit to see how many accounts they are on where they are listed as authorized rather than primary. Be mindful that the more authorized accounts you are on, the lower your credit may drop.

Fraud: If you actually had to pay to have your name added as an authorized user on a credit account, you should be aware that you might actually be guilty of fraud. Business owners should be aware of this and have their names immediately removed from any accounts that they paid to have their names added to. The last thing a small business owner needs is a fraud lawsuit coming up on their record. It is best to stay away from these types of accounts all together.

Stop adding yourself to new accounts: Especially newlyweds or business partners. If you are considering having a joint credit account, do not. This decision could only put your small business in jeopardy. Consider opening two separate credit accounts with your name only as a primary user. This is the only way to ensure you maintain a good credit score.

Open a credit account: If you do not have any credit accounts that list you as the primary user, it may be a good idea to open one or two credit accounts of your own. Make sure they are accounts that you can afford to maintain and pay off. This is a great way to improve your credit score. Especially consider opening an account if you are a woman. Women tend to be authorized users more often than men. This means that women will be more impacted by these changes and should consider their own accounts.

Scott Letourneau is the CEO of Fast Business Credit, Inc. and has a valuable free guide to help small business owners get access to capital plus a new program to help business owners understand the entire credit score formula! Go to our Business Credit Program page for powerful details!

Small businesses are extremely important to our culture and our economy. In fact, small businesses make up a very significant portion of our economy. The financial success of America’s small businesses lies heavily on their ability to attain credit in order to maintain their business. It is shocking that nearly all small-businesses fail in their first months or years of business. One of the primary flaws of the way people run their businesses is being lax when is comes to book keeping and cash flows. However, taking some steps to alleviate and deter credit problems can ensure a continuous supply of capital and will almost ensure business success.

One of the main problems with not having a good credit score is that you may not be approved for loans and credit cards for your business and it is these loans and credit cards that establish and provide capital security for businesses. It is important for individuals to keep their personal and business credit separate. This means that you do not use personal credit accounts to establish or create capital for your business. This can put business owners at risk and makes them personally responsible for liabilities they may incur.

Separating your personal and business credit also has been shown to improve cash flows and maintaining accounts. This allows you to increase your credit and even help you save cash. Different kinds of credit are needed for all business owners and you should know what you need. For example, if you are running a major office based business with many supplies and office employees, you may need a forty thousand dollar line of credit with Office Max. But if you run a small business from home your line of credit may come from the bank that you do business with. Either way, lines of credit are like cash, they increase your assets and help the success of a business. You may even use a line of credit to directly give you cash, say to pay for marketing expenses or office space. Either way, these are all things that ultimately benefit your business. It is important for businesses to have capital, especially if they have these other lines of credit. This is because you cannot use your line of credit with Office Max to pay rent or payroll expenses.

If you have a corporation, you may be eligible to receive a lot of money in credit. This is very important for new businesses because they need to have significant amounts of capital to remain in business. Often times, companies that are incorporated can get one hundred thousand, five hundred thousand, or even one million dollars in credit limits, which is a great start up amount of money.

New small business owners should be sure to increase their chances of getting capital and should consider the benefits of separating personal and business accounts. This should be done for the sake of organizing cash flows, increasing capital, and ultimately increasing revenues.

Scott Letourneau is the CEO of Fast Business Credit, Inc. and has a valuable free guide to help small business owners get access to capital plus a new program to help business owners understand the importance of credit! Go to our Business Credit Program page for powerful details!