Follow up to Part 1; we’re discussing the 4 biggest credit mistakes small business owners are making (and how to fix them). In 2010 Keybridge Research study, quantifying the Impact of Credit Cards on Small Business Growth & U.S. Job Creation, found that each $1,000 in credit card use was associated with an increase in firm revenue of approximately $5,500. Each $5,613 increase in credit card use per month created one net new job.
Furtheremore, John Ulzheimer, the nation’s premier credit expert, “one of the most misunderstood elements of credit scoring is how the excessive leveraging of credit cards that report to your personal credit reports will not only hurt your credit scores but, as a result, will also make it difficult to obtain additional funding in the future.”
Mistake #3: Overutilizing Your Business or Personal Credit Card
If you’re using too much of your available credit on a personal credit card or on a business credit card that reports to your personal credit report, you’re damaging your credit score. Utilization begins to impact your FICO score when you start using more than 10 percent of available credit on any card that reports to your personal credit report. Although using between 10 and 30 percent of your available credit on these types of credit cards is generally acceptable to most lenders, using more than 30 percent of your available credit will negatively affect your FICO scores and make it much more difficult to obtain additional financing when needed. Thirty percent of your FICO score is determined by your utilization.
Overutilization can also prevent you from obtaining larger lines of credit or higher credit card limits. If you’re seeking $50,000 to $150,000 in capital, you typically need to obtain the money from several places—for example, a $15,000 line of credit from one source, a $20,000 line of credit from another, and a $25,000 line of credit from a third. However, if you’ve overutilized your available credit, you won’t be eligible for credit limits that high. If you qualify at all, you’ll likely to be limited to borrowing $1,000, $2,000 or $3,000, which isn’t much help to a growing small business. This is where average approval statistics are deceiving. Business owners sometimes think the goal is just to get approved, but did you really succeed if you only got approved for $2,000 when you could have gotten $15,000 or more from that same lender if your utilization was lower?
Mistake #4: Not Having Enough Available Credit
Both as consumers and as business owners, we’re often told to minimize our use of credit cards, and to keep our credit limits manageable. So how can having lots of available credit be a good thing?
Suppose there are two business owners, both with FICO scores of 800 and outstanding credit card balances of $2,500 on credit cards that report to their personal credit reports. The only difference: One business owner has a total of $100,000 in available credit, and the other has $20,000.
Now suppose each of the two business owners has their line of credit lowered by $15,000. For the small business owners with $100,000 in available credit, this isn’t a big deal. He or she still has $85,000 in credit to work with.
If you’re the small business owner with just $20,000 in available credit, however, this is a huge deal. Suddenly you only have $5,000 in available credit. Making matters worse, since you’re carrying a balance of $2,500, suddenly your available credit is 50 percent utilized. Because you’re using 50 percent of your available credit, your FICO score drops significantly. You have less money available to you, and your options for obtaining more are severely limited—all because you didn’t have enough available credit.
Think this can’t happen to you? It very easily can. In a survey by the National Small Business Association (NSBA), 41 percent of small businesses reported having their credit limit reduced in the past year. A recent study by the National Federation of Independent Business (NFIB) found that the number of small business owners with lines of credit has declined by 10 percent since 2008, and that just 70 percent of small business owners seeking to renew their lines of credit were successful.
Having $100,000 or more in available credit can protect both you and your business, a large number of people with FICO scores of 800 have this much available credit. However, a survey by the National Small Business Association (NSBA) found that just 23 percent of small business owners have available credit of $100,000 or more, and 16 percent have under $20,000 in available credit-putting their businesses at risk.
This concludes the series the 4 biggest credit mistakes small business owners are making, to better understand how to properly obtain a Small Business Loan or Unsecured Business Lines of Credit talk with a small business resource specialist at 1.888.783.1503 or click here. If you would like to read the The Silent Credit Killer click here.
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