You’re FICO credit score is designed to give small business lenders a clear understanding of how well you manage debt. The majority of small business lenders use your FICO credit score to determine whether you qualify for small business financing. This is why it’s important that you know your FICO credit score before you apply for small business financing. Knowing your FICO credit score also means understanding what information is on your individual credit report. The information reported to a major credit bureau via your creditors is what’s on your individual credit report. That information determines your FICO credit score.
In this blog, you’ll learn why the information on your individual credit report is important when applying for small business financing. You’ll also learn how this information is used to determine your FICO credit score. By the end of the blog, you’ll know why your consumer credit history is more important than your FICO credit score when applying for small business financing.
Your Consumer Credit History Influences Your FICO Credit Score
A good credit score is based on a good consumer credit history. The information a credit bureau reports on your consumer credit file is used to calculate your FICO credit score. Your FICO credit score is calculated based on five components. These components make up the FICO score model. The FICO score model uses your payment history, amounts owed, length of credit history, credit mix and new credit to calculate your FICO credit score. This is why the information reported by a major credit bureau to your consumer credit file is more important than your actual FICO credit score.
What Small Business Lenders Look for on Your Credit Report
Small business lenders focus on your payment history, amounts owned on loans or lines of credit, the length of your credit history, the different type of credit accounts in your name, and any new credit accounts you have applied for in the last six months. They focus on these components of your credit report because this is what is used to calculate your FICO credit score. Each component used to calculate your FICO credit score gives a small business lender a good idea of how well you manage debt. An explanation of each component of the FICO score model (and how lenders view each component) is below.
- Payment History (35% of Your FICO Credit Score) – Small business lenders will look at your payment history to see how often you pay your monthly bills on time. If you have more than 2 late payments in the last 24 months, it could negatively impact your ability to get approved for small business financing. This is especially true for unsecured business lines of credit. If you are applying for unsecured business lines of credit, your payment history for the last 2 years needs to be immaculate.
- Amounts Owed (30% if Your FICO Credit Score) – The amounts you owe toward your existing debts is also important to small business lenders. If you have too much debt, lenders may feel that you won’t be able to manage any additional debt. Therefore when applying for small business financing, it is ideal that the amount of outstanding debt you have is low. If you are unsure if whether you have too much outstanding debt (in comparison to your income), click here to calculate your debt-to-income ratio. A debt-to-income ratio is determined based on dividing your monthly debt obligations by your monthly income. Your debt-to-income ratio is almost just as important as your FICO credit score.
- Length of Credit History (15% of Your FICO Credit Score – The longevity of your credit history is significant. A credit card issuer, mortgage lender, and/or small business lender will all expect you to have a certain number of years under your belt when it comes to borrowing money. A small business lender will look to see if you have credit cards, lines of credit, and mortgage loans in your name. This will give them a good idea of whether you can manage debt over time. A limited credit history could be the determining factor in getting denied for small business financing.
- New Credit (10% of Your FICO Credit Score) – Applying for too many types of credit in the previous six months before you apply for small business financing could result in a denial. If you have been diligently seeking financing and applying with many different sources, it will create a number of hard inquiries on your credit report. Too many hard inquiries (or too many new credit accounts) could impact your ability to get approved for small business financing. I strongly suggest that you avoid applying for other types of financing within 6 months of applying for small business loans and/or lines of credit.
- Credit Mix (10% of Your FICO Credit Score) – Managing different types of credit very well (over time) is impressive to small business lenders. They will want to see that you can manage a mortgage loan, auto loan, and a credit card, etc. Diversifying your credit accounts will increase your FICO credit score and improve your chances of obtaining small business financing.
Get Your FREE Credit Score from NAV
I recommend checking your credit history via NAV before you apply for small business financing. You can get a free credit score and free credit report from NAV. I recommend NAV because they can provide you with your personal and business credit scores. As an entrepreneur, it’s important to build business credit as soon as possible. As your business grows lenders will begin checking your business credit history (in addition to your personal credit history) to determine your eligibility for financing.
Work with an Expert to Obtain Small Business Financing
After you check your FICO credit score using NAV, the next step is working with an expert to obtain small business financing. For example, LenCred is an expert in helping entrepreneurs and small business owners obtain the financing they need to grow. If you apply for small business financing via LenCred, an Advisor will be assigned to you. The Advisor will review your personal credit history to determine whether or not you will qualify for small business financing. If you have bad credit, they will tell you what’s affecting your ability to get approved for small business financing. If you have a good credit score, they will tell you what small business financing options are available to you. If you’re interested in working with LenCred to apply for small business financing, click here to get started.