Geoff Williams, author of “Living Well with Bad Credit” told Time in 2010 that someone making $200,000 a year can have the same credit score as someone who makes $20,000 a year. An obvious explanation is the fact that FICO and its competitors do not factor in income when calculating credit scores. FICO calculates scores based on five factors: payment history (35%), credit utilization (30%), length of credit history (15%), types of credit in use (10%) and new credit (10%).
The only role income plays in the small business loan approval process is determining how much the lender is willing to let you borrow. Income has little if any bearing on interest rate, additional fees and whether the loan requires some form of collateral.
United Capital Source, however, understands the error in favoring credit score over income when deciding whether or not to approve a small business loan. This is largely because there are several reasons why the owner of a rising or steady business could have bad credit.
1. HAVING JUST ONE CREDIT CARD
Even if you pay your balance in full and on time every month, using only one credit card can have a significant impact on your credit score. As previously stated, 30% of your credit score is made up by your credit utilization rate, or the percentage of your available credit that is being used.
If you have a credit limit of $100 and a statement balance of $20, your utilization rate is 20%, a good number. But if your credit limit is over $3,000 and you borrow over $2,500 during a particularly chaotic month, you will drive up your utilization rate and shrink your credit score well below 600.
You can avoid this by taking out multiple credit accounts so you don’t have to use a single credit card so much.
United Capital Source offers business lines of credit and term loans designed to compensate for those unforeseen, chaotic months. These programs, which carry terms of up to 60 months, will take care of large, one-time expenses and allow you to save your credit card for regular, monthly payments that won’t raise your utilization rate.
2. MAKING THE WRONG PAYMENTS FIRST
In 2013, about 2 in 5 Americans saw their credit scores shrink due to unpaid medical bills. This type of debt tends to arise when people incorrectly assume their insurers paid the entirety of a bill.
Unpaid medical bills, in addition to any debt handled by a collections agency, can lower your credit score by up to 100 points. Collections agencies will bother you much more frequently than credit card providers about paying them back. You might decide to skip a monthly credit payment in order to stop the endless assault of calls and emails from the collections agency.
But according to Forbes, collections debt deals its maximum damage to your credit score the moment it first appears on your credit report. Your credit score will not shrink any further if you wait to pay it back.
Missing just one credit payment by more than 30 days, on the other hand, could just as well cut your credit score in half. These payments, along with all active accounts, should be your number one priority.
The sudden need for more money than you’ve got can be solved by a merchant cash advance from United Capital Source. This program provides a lump sum that is paid back through a percentage of credit card transactions. You can pay off that medical bill in one shot and then pay off the loan whenever your business sees an uptick in sales.
3. YOUR PERSONAL CREDIT SCORE IS NOT YOUR BUSINESS CREDIT SCORE
The credit score that is reviewed by lenders is your personal credit score, which is completely separate from your business. A business credit score reflects your business’s ability to pay its bills on time. But unlike a personal credit score, a business credit score factors in the size of your company, gains or losses from legal disputes, and risk factors in your industry.
Usually a number 1 to 100, a business credit score can be wildly different depending on the credit agency, whereas personal credit scores from multiple agencies tend to be in the same ballpark.
It’s also much easier to improve a business credit score than a personal credit score, which can be lowered based on nearly ninety factors and only raised by half a dozen. This suggests that a business owner’s poor personal credit score does not necessarily indicate an unreliable business that is stricken with debt.
The business loan experts at United Capital Source prefer to judge potential borrowers based on the performance of their businesses. For certain programs, applicants must only present the three most recent months of bank statements or credit card sales to prove how trustworthy their company is. If the business in question has the trust of its customers and vendors, poor personal credit will not deny bad credit business loans with no collateral necessary.
United Capital Source has provided loans to hundreds of businesses with high incomes and poor credit. To speak with an expert about obtaining the means to adapt and compete, call 855.933.8638 or visit the UCS website. The UCS approval process lasts just a few days, the same amount of time it will take for funds to enter your bank account.