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Select From a Wide Variety of
Personal Credit Repair & Business Loan Prep Options
Improve Your Credit Standing & Obtain the Financing That’s Right For You
United Capital Source puts our business financing experience to work by helping to improve credit standings and acquire financing for those who otherwise find credit or loans out of reach. We help our clients get expert advice, guidance, and resources that have helped 76% of our clients successfully secure home loans, small business loans, lines of credit, and more. Talk 1-on-1 with a Credit & Lending specialist today to get started on a tailored plan that can help you achieve your financial goals.
Business Credit Products
Personal Credit Products
Mortgage & Loan Prep
Provide 90 Days of service for the items listed below:
- Update all personal information to reflect accurately with all three bureau’s.
- Request validation for all negatively reporting items on credit.
- Dispute all negatively reported items on credit for accuracy and compliance with FDCPA, FCRA and statute of limitations.
- Credit Building Consultation. Teaching you how to maximize your potential score increase.
Starting Amount:
$795
- Challenge inaccurate information.
- Credit building consultation.
- Credit score improvement strategies.
Student Loan Consolidation
Provide 90 Days of service for the items listed below:
- Federal Student aid consultation. Including student loan total educational indebtedness and repayment options.
- Federal Direct Consolidation Application.
- Request Income-Based REPAY (IBR) or fixed Graduated Repayments.
Check Public service loan forgiveness (PSLF) Eligibility. - Once Consolidated, Update Previous student loans with all Credit bureaus to reflect as satisfied.
- Plus everything under Mortgage Preparation.
Starting Amount:
$795
- Federal or private consolidation.
- Public service loan forgiveness (PSLF)
- Mortgage & loan prep. included.
The Inquirer
Provide 90 Days of service for the items listed below:
- Credit building consultation.
- Update all personal information to reflect accurately with all three bureaus.
- Request validation for all negatively reporting items directly with the creditors for accuracy and compliance with FDCPA, FCRA and statute of limitations.
- Request 1099-C directly from the creditors for open balance charges off.
Remove unwanted authorized users. - Remove unauthorized Credit inquiries.
- Buffering credit inquiries made for the same financing purpose, in a short time frame.
- “Experian Boost” Consultation to strengthen the most commonly pulled bureau for small business owners.
Starting Amount:
$1,350
- FICO™ based inquiry buffering.
- Mortgage and loan prep included.
- Credit score improvement strategies.
Business Funding Prep
Provide 90 Days of service for the items listed below:
- Credit building consultation.
- Update all personal information to reflect accurately with all three bureaus.
- Request validation for all negatively reporting items directly with the creditors for accuracy and compliance with FDCPA, FCRA and statute of limitations.
- Request 1099-C directly from the creditors for open balance charges off.
Remove unwanted authorized users. - Remove unauthorized Credit inquiries.
- Buffering credit inquiries made for the same financing purpose, in a short time frame.
- “Experian Boost” Consultation to strengthen the most commonly pulled bureau for small business owners.
Starting Amount:
$1,350
- FICO™ based inquiry buffering.
- Mortgage and loan prep included.
- Credit score improvement strategies.
Credit Ready Business
Provide 90 Days of service for the items listed below:
- Complete 21 point lending compliance checklist to ensure accurate and current information.
- Update All company industry, SIC code, Employer count, competitors , vendors and financials with D&B
- Dispute Incorrect information such as UCC liens, Tax liens and other negatively reporting items.
- Helping obtain business credit footprint by initially opening first reporting trade account such as new business credit cards and vendors.
Starting Amount:
$1,550
- Correct UCC, Tax and Other Liens.
- Slow Payment Experience Correction
- Business Credit Re-Building
StartUp Capital Prep
Provide 90 Days of service for the items listed below:
- Form A New LLC Or S-Corp.
- Register your Business Credit with Experian, Equifax and Dunn & Bradstreet using SBA- Lender Best practices.
- Business funding prep.
- Plus everything under Mortgage Preparation.
Starting Amount:
$1,850
- Business filing an LLC or S-Corp.
- Register Experian, Equifax and D&B.
- Business funding prep.
SBA & Term Loan Prep
Provide 90 Days of service for the items listed below:
- Complete 21 point lending compliance checklist to ensure accurate and current information.
- Order Duns Number
- Update All company industry, SIC code, Employer count, competitors , vendors and financials with D&B
- Order Business Credit Reports with D&B, Experian and Equifax.
- Complete a compliance update with Experian and Equifax databases using the correct information.
- Dispute Incorrect information such as UCC liens, Tax liens and other negatively reporting items.
- Helping obtain business credit footprint by initially opening first reporting trade account such as new business credit cards and venders.
- Provide list of Companies that allow for Business Net21 , Net30 and Net60 payments.
- Business Loan and Corporate Funding Consultations.
- SBA Loan Preparation and SBA Grant Prep for Minority and Women’s Small Business Grants.
- Provide resources to help businesses utilize existing cash flow and manage company finances in a more lending friendly fashion.
Starting Amount:
$2,250
- SBA Credit Best Practices.
- Credit Ready Business Included.
- Business Funding Prep Included.
Federal Contracting Prep
Provide 90 Days of service for the items listed below:
- MBE, Veteran & Women owned small business credit preparation package.
- WOSB Dunn & Bradstreet Star.
- WOSB SBA 7(a) cert.
- SBA & term loan prep included.
Starting Amount:
Contact Us
- SAM registration
- 8(a) Certification
- SBA & Term Loan Prep
What Are The 5 C’s Of Credit?
Business bank loans are notorious for being unnecessarily complicated, particularly when it comes to the approval process. As if mountains of paperwork weren’t tedious enough, potential borrowers must also fulfill a series of criteria known as the 5 C’s of Credit.
The 5 C’s stand for Character, Capacity, Capital, Conditions, and Collateral.
Each factor simply presents another excuse for denying a perfectly healthy business with loads of potential the funding it needs to stay competitive. The criteria can be both broad and narrow at the same time, putting potential borrowers in a lose-lose situation.
1. Character
Banks use this word to give the impression that people who seem trustworthy, honest and responsible during face-to-face interactions have a higher chance of approval. This couldn’t be farther from the truth. Credentials, references, and your reputation within your industry are examined but they are not what banks are paying most attention to when they attempt to assess your “character.”
In the banking and loan industry, “character” is actually code for “credit history.” In the opinion of banks, you can’t possibly have good character without a perfect credit score. This is reportedly the most important element of the 5 C’s of Credit, as opposed to, say, the current financial standing of the borrower’s business. Alternative business financing companies, on the other hand, have repeatedly proven that a low credit score in no way ascertains that a borrower won’t be able to pay off debt. Many hard-working business owners have low credit scores for a variety of reasons, such as having just one credit card, a low credit utilization rate, or unpaid medical bills.
2. Capacity
This is the only “C” that actually has some relevance, because it really stands for “cash flow.” All lenders, not just banks, measure cash flow by looking at cash flow statements and your debt-to-income ratio. They want to know how much capital you have available every month after covering regular payments like payroll, rent or inventory. Your financial statements must show that you have plenty of unused capital that can now be devoted to loan payments.
The only problem is that traditional lenders will review cash flow-related data for several months if not years, usually because such lenders only approve businesses that have been in existence for at least two years. A number of industries experience cyclical inconsistencies in revenue, especially those that conduct the most sales during certain times of the year, like the summer or holiday season. Cash flow statements from these businesses would suggest instability or even a difficulty surviving if they show an entire year’s worth of information. This is why alternative business financing companies like United Capital Source only review fairly recent financial statements and bank statements. Odds are, if a business has money in the bank and is currently performing well, some extra funding will surely be put to good use.
3. Capital
This refers to how much of your own money you’ve invested in your business. Traditional business lenders are more likely to approve business owners who have something to lose if the business fails because it means the lender is not 100% responsible for supporting them. They want to see that you’ve made personal sacrifices to start your business and maintain it through thick and thin. Business owners who have their well-being resting in the hands of their business will fight harder to keep it alive.
The track record of traditional business lenders, however, suggests that Capital is the least important of the 5 C’s. If banks valued personally-funded businesses so favorably, wouldn’t the wealthiest businesses have a much harder time being approved? Businesses that are funded by wealthy families, for example, are in no way at a disadvantage when it comes to obtaining additional funding. You would think that women would be more likely to be approved for business loans than men considering women start their businesses with half as much money as men. This is clearly not the case: Small business loan approval rates for women are 15-20% lower than men, according to the National Women’s Business Council.
4. Conditions
Certain industries are often stereotyped as “risky” due to financial instability, rate of evolution, or issues that occurred in the past. Traditional lenders primarily approve businesses involved in industries that are doing very well and are not poised for any significant changes. If a lot of businesses similar to your own are failing, your chances of being approved are extremely low.
This element of criteria is unfair to the countless businesses that are performing well despite being part of industries that are prone to instability, like retail, food service and hospitality. Not only are these industries highly-competitive, but they are also prone to seasonality, or a dramatic drop in revenue in the months before the summer or holiday season. What traditional lenders don’t realize is that even the most successful businesses can experience inconsistencies in cash flow, solely because of the natural progression of their industry. Alternative business financing companies do not discriminate based on such conditions because the businesses they impact are capable of generating massive amounts of revenue when the opportunity presents itself.
5. Collateral
Borrowers are immediately perceived as reliable if they can provide collateral, or something the bank can sell if the borrower fails to pay off the debt. Examples include real estate, equipment, or a car. Collateral is mandatory for most bank loans, and many traditional business lenders will only let you borrow an amount equal to the value of whatever you’re willing to put up.
You don’t have to be a financial genius to understand why a lot of business owners wouldn’t want to risk losing their car or their home. As if taking out a small business loan wasn’t stressful enough. It’s obviously difficult to manage funding correctly when vital possessions are on the line, no matter how confident you are in the initiative at hand. Besides, most owners of newer businesses don’t own property or expensive equipment. Unless you have been in business for at least a year or so, equipment, inventory, property and company cars are typically rented.
How Does Credit Work? The Ultimate Credit Score Guide
Credit plays an increasingly bigger role in your life as you advance your career and reach for more milestones. Think about all the things you might want in the near future. Everything from a house to a business loan to a new cell phone plan. Your ability to access all three would depend on your personal credit score. If you use your credit wisely, your financial limitations will put less restrictions on your purchases and other goals. Simply put, perhaps the greatest reward of proper credit management is always having more credit at your disposal.
Many people, especially business owners, believe that understanding credit just means knowing how to achieve an excellent credit score. But the actions that produce excellent credit aren’t the only actions that affect your credit. When you know how credit works in general, you can make smarter spending decisions and grow your business and credit simultaneously.
In this guide, we’ll explain the different types of credit, the components of your credit score, and how to improve and build credit throughout your career.
How Credit Works In General
Credit bureaus create your credit report by collecting information about your credit usage after you open a credit card or apply for a loan. Five elements of this information are then used to calculate your numerical credit score: payment history, credit utilization, credit mix, length of credit history, and applications for new credit. Your credit score determines your ability to qualify for various forms of financing.
How Does Credit Work? Borrowing Fundamentals
Consumers acquire credit when they borrow money from financial institutions, most notably credit card vendors, banks, or business lenders. The institution, or “creditor,” reports the amount borrowed, the agreed-upon repayment schedule, and the size of each payment to credit bureaus. This information then appears on the individual’s credit report. In addition to credit cards, applying for and paying back virtually any sort of loan affects your credit score. This could be for your business, your car, your house, or your college tuition.
Your credit score therefore acts as a representation of your ability to pay off debt. This is why financial institutions and property management companies look at your credit score before approving your application. They want to gauge the likelihood of you fulfilling the terms of the agreement, like the size of the monthly payment and the due date for paying off the full amount.
Business lenders devote an especially large degree of attention to credit score because small businesses fail all the time. This might not seem fair because you are applying for a business loan, not a personal loan. But when you start a business, you are accepting full responsibility for the business’s potential failure. It was your decision to start the business. All in all, entrepreneurship is really another personal financial venture.
Types of Credit
Though you can secure many different types of agreements with creditors, there are two main types of credit accounts. They differ primarily in how they process payments and how they are recorded on your credit report. The two accounts are installment credit accounts and revolving credit accounts.
Installment Credit
If you know how a traditional business term loan works, you know the basics of installment credit. There’s a specific due date and repayment schedule. The agreement likely outlines how many monthly payments you’ll have to make in order to pay off the debt in full.
Most car loans, student loans, and mortgages are installment credit accounts. The terms are long because the monthly payments are relatively small. So, during the first few years, your credit utilization ratio will likely be very high because you’ll owe a lot of money and will only have paid back a small portion of it. Towards the end of the term, however, your credit utilization ratio will significantly decrease. That’s a key tenet of installment credit accounts: When the end of the term approaches, you’ll have much less money to pay back.
Revolving Credit
Revolving credit is most often associated with credit cards and business lines of credit. You have a credit limit and minimum monthly payments that begin as soon as you use the available funds. Interest accrues every month as long as you maintain an outstanding balance (continue to owe money). Borrowing more money increases your interest as well. You pay interest for the convenience of being able to make large purchases without having to actually pay for the majority of it until much later on.
And when you pay back what you owe, that money becomes available again. For example, let’s say you have a $12,000 credit limit and you use $10,000. At that point, you’d only have $2,000 left to use. But if you pay back $8,000, you now have $10,000 to use again.
This can be confusing and dangerous for people who have used most of their credit but only make minimum monthly payments. In this case, most of your monthly payment would go towards interest, so you wouldn’t be paying off as much of your balance as you might think.
Types of Borrowers
Though most credit cards and lines of credit are revolving accounts, many borrowers do not use the revolving function at all. For this reason, creditors categorize borrowers into two groups: transactors or revolvers.
Here’s the main difference between the two:
Transactors
Transactors borrow a certain amount every month and then pay off their full balance that same month. They have no interest on their accounts because they always pay back what they owe within a month’s time. In addition to saving money, being a transactor protects your credit score because you owe nothing and have plenty of credit available.
Thus, people who need to maintain excellent credit scores (i.e. business owners) might open new credit accounts solely to become transactors. These borrowers typically use the funds for one purpose, like covering a fixed business expense every month. Constantly paying off the full balance acts prevents their other credit activity from hurting their credit score.
Revolvers
Most borrowers are revolvers because they carry a “revolving” balance month to month. They make small monthly payments and carry much larger balances, usually within the thousands. Being classified as a revolver denotes that you probably don’t have the financial capabilities to increase your average monthly payment by much.
Though it’s perfectly feasible for revolvers to maintain a good credit score, the massive gap between their outstanding balance and their monthly payments makes their score very sensitive. In this case, just one missed payment could significantly reduce your credit score.
Why Do These Things Matter?
The two previous sections (types of credit, types of borrowers) highlight additional information featured on your credit report. Financial institutions will consider both factors when deciding whether to approve your credit card, loan, mortgage, etc.
Earlier, we mentioned that one of the elements of credit score is “credit mix.” Some borrowers mix up their credit by managing one installment account (like a business term loan) and one revolving account (like a business line of credit) simultaneously. Also, the existence of the “transactor” status shows that you can take another step farther to impress credit bureaus and protect your credit score. Someone who isn’t aware of transactors might assume credit bureaus would find it unnecessary to open another account solely for this reason.
In summary, the type of borrower you are and the type of credit you use provide more insight into your capacity as a borrower.
How Does Credit Work? Credit Bureaus and Credit Reports
Your credit report reveals how you acquired and paid back the most important purchases of your life. People have similar goals (house, wedding, etc.) but everyone goes about achieving them in different ways. The methods you chose to achieve your goals and how they affected your financial future can be viewed in your credit report.
But this isn’t a story we get to tell on our own. Instead, your credit report is composed by the three main credit bureaus: Experian, Equifax, and TransUnion. These agencies create reports by collecting information and summarizing it to give financial institutions all the criteria they need to make credit-related decisions.
Each agency has its own method of collecting information. They might collect different pieces of data at different times. And the information each agency collects depends on whether the institution reports to that agency. A credit card vendor, for example, might report to a different agency, or fewer agencies, than a business lender or mortgage company. But no matter which bureau you get your credit report from, each version will most likely look the same.
According to federal law, all individuals are permitted to one free credit report from each bureau every year. Taking advantage of this law is crucial for improving your use of credit and understanding how you’ve arrived at your current score.
Credit reports from the three bureaus look alike primarily because they all use the FICO scoring system.
How Does Credit Work? Calculating Your Credit Score
Your credit score condenses all the information in your credit report into a three-digit number. Thanks to this number, institutions don’t have to go through your entire credit report to see how likely you are to make timely payments. Your credit score tells them how long you’ve been using credit, the types of accounts you have, and how you’ve handled the responsibilities attached to those accounts. The height of your credit score can therefore reflect your likelihood of making timely payments.
All credit bureaus use the FICO algorithm because it ensures that credit scores are calculated through a standardized procedure. The formula incorporates numerous elements of your credit history and is therefore fairly complex.
The FICO Algorithm
The name “FICO” comes from the Fair Isaac Corporation, which designed the algorithm in 1960s. It primary purpose is to determine the likelihood of a borrower defaulting on debt payments within the span of 18 months. Borrowers with lower credit scores are therefore more likely to default in that time period, while borrowers with higher credit scores are less likely to see this outcome.
The highest possible score is 850, and the lowest is 300.
- Excellent: 740-850
- Good: 680-739
- Fair: 580-679
- Poor: 500-679
- High Risk/Untouchable: 499 and under
As long your credit score falls within the “good” range, you shouldn’t have much trouble accessing business loans, new credit cards, etc.
The exact components of the FICO algorithm are not public. So, outside of the three bureaus, no one really knows how a credit score is calculated. All we know is the criteria the bureaus factor into their calculations, and it’s broken into five categories.
Let’s go over all of those, from the most important to the least:
1. Payment History (35%)
No single factor has more influence on your credit score than your past payment history. Thus, the timing of your payments can either significantly help or hurt your score. Rule number one for building and maintaining excellent credit is to always make payments on time.
Since timely payments are so important, your credit score increases when you have as many timely payments as possible. You can accomplish this by establishing timely payment histories with multiple credit lines. On the other hand, the amount of damage inflicted by missed payments depends on a variety of factors. This includes how late the payment actually is, how many times it’s happened before, and your outstanding balance. As mentioned earlier, if you have a high balance and only pay the minimum payment every month, one missed payment could be costly.
If you miss a payment, your credit score will decrease every 30 days you go without paying your minimum. The first real hit will therefore occur 30 days after missing your payment. If you go another 30 days (60 days total) without paying, the damage will be much worse. The cycle continues for 90 days, 120 days, etc.
You can gradually recover from missed payments by establishing a long record of timely payments moving forward. Even if you’ve missed multiple payments, a newly impeccable payment history can still build your score back up. In fact, all late payments get erased from your credit report with seven years after the first due date was missed. For this reason, it’s much less hazardous to have one missed payment on your record from years ago than to have recently missed a payment.
2. Amounts Owed (30%)
This refers to the total amount of credit you owe, or the sum of your outstanding balances. The amounts owed category also factors in your credit utilization ratio, or the ratio between your outstanding debts and your credit limits. Your credit utilization ratio can offset a high outstanding balance, low monthly payment, or other potential signs of poor credit.
Each account has its own utilization ratio, and the ratios for some accounts will impact your credit score more than others. For example, installment credit accounts tend to have fixed ratios because you’re supposed to make the same payment every month and the ratio directly depends on the account’s due date. Hence, ratios for installment credit accounts will have less impact on your credit score than revolving accounts. Credit cards and lines of credit have borrowing limits but unlike installment accounts, you can repeatedly borrow and pay back as much as you want each month. In other words, you have much more control over how much you borrow and how you pay it back.
So, if your credit report shows a revolving account with a high utilization ratio, it probably means you owe a lot of money and have accrued a high interest rate. Borrowers of this nature typically use their credit cards too often and perpetually owe more money than they can afford to pay back. These habits make someone statistically more likely to default on a payment.
A good credit utilization ratio should not exceed 30%. If your credit limit is $20,000, a credit utilization ratio of 30% would mean you never borrow more than $6,000 at a time if you already have an outstanding balance.
3. Length of Credit History (15%)
It’s nearly impossible to achieve a good credit score with little credit history to go by. The FICO algorithm works in your favor when it has more data to use. Even if you rack up six months of timely payments, the algorithm still doesn’t have enough data to confidently predict that you’ll be just as responsible with a loan or credit card.
In order to gain enough data to build good credit, you must have an account open for at least one year. Thus, you essentially have no choice but to tough out that first year with a lower credit score.
4. New Credit/Credit Inquiries (10%)
Many borrowers do not understand why opening a new credit account automatically hurts their credit score. It’s because pulling your credit report from multiple bureaus tells the FICO algorithm that you will soon be borrowing more money. Your score will go down a few points but should begin to recover after about six months of timely payments. After two years, the damage from the credit pull will disappear from your credit report.
Checking your own credit score, however, will not hurt your score, no matter how many times you do it. You can also find institutions perform soft credit pulls instead of hard pulls to minimize the impact on the borrower’s credit.
5. Credit Mix (10%)
As long as you make timely payments, opening a wider variety of credit accounts only helps your score. This gives the FICO algorithm more data to create an accurate prediction of how you’ll handle future accounts. The algorithm therefore favors borrowers who are currently paying back credit cards, mortgages, and/or business loans simultaneously. Proving your ability to manage multiple types of accounts shows that you will most likely have no trouble managing your next account, no matter the type.
Think about it: The likelihood of someone missing a car payment is low because it carries dire, immediate consequences. The likelihood of missing a credit card payment, however, is higher because there’s few (if any) immediate consequences. Hence, a borrower whose only account is a car payment would not score well in the credit mix department.
How Does Credit Work? Fixing Errors On Your Credit Report
Unfortunately, mistakes appear on credit reports all the time. Your report could say that you owe more than you actually do, or claim that you missed a payment despite your flawless record. But you wouldn’t know unless you check your credit report regularly, or at least once a year. It’s your responsibility to spot the error and get it fixed. You can either contact the institution associated with the account or contact the bureau that created the report.
Borrowers often avoid checking their reports out of fear that they’ll see something they don’t like. But aside from making timely payments, keeping your utilization rate low and opening a variety of accounts, this is really all you have to do to ensure an excellent credit score. You simply must check your report, even if you have no reason to believe an error has been made.
What Is An Excellent Credit Score And How Do You Get It?
Credit score is the number one factor for obtaining a small business loan. It’s the first thing most financial institutions look at when determining approval. Other factors, like annual revenue and time in business, are also very important but won’t play as big of a role as personal credit score. Without excellent credit, it is nearly impossible to be approved for a high borrowing amount accompanied by convenient terms and a low interest rate.
Luckily, achieving and maintaining an excellent personal credit score isn’t difficult at all. In this guide, we’ll go over the best practices for improving personal credit, which activities affect personal credit, and the relationship between personal credit score and business credit score.
What Is The Best Possible Credit Score?
The highest possible personal credit score is 850. As astronomical as that number may seem, it is entirely attainable if you adhere to just a few basic principles. But depending on your needs, your credit score might not have to be anywhere near 850. In fact, you may be able to obtain the right business loan for you with just a “good” credit score.
Still, there’s no downside to trying to get your credit score as close to perfect as possible. Before explaining how to do that, let’s clarify what a personal credit score actually represents:
What Does A Personal Credit Score Represent?
Most small business owners have numerous credit scores, such as their VantageScore and business credit score.
But when it comes to small business loan requirements, financial institutions are referring to your personal credit score. By definition, a personal credit score is a numerical representation of your ability to repay debt. Credit cards, mortgages, student loans, and business loans are examples of debts that make up your personal credit score.
Why Do Institutions Care So Much About Personal Credit?
At first, it doesn’t seem fair for institutions to put so much worth into an applicant’s personal credit score. After all, you are applying for a business loan, not a personal loan. But small business owners are in charge of their business’s finances. You could even argue that much like the aforementioned examples of debt, a small business is just another personal financial venture.
Based on that logic, an applicant’s track record with personal debts is indeed an accurate indicator of how he or she will handle a small business loan. Small business owners are not like the stereotypical scientist or artist: They aren’t amazing at their jobs yet a total mess in other aspects of their lives. A small business owner who can’t manage credit card debt will probably have the same luck with business loan payments.
Every institution has its own requirements and underwriting process. Some institutions frequently work with borrowers with poor or little credit history. Their highest borrowing amounts and most advantageous terms, however, are only available for borrowers with good credit at the very least.
Why Is Credit Score Used To Assess Risk?
Financial institutions take a risk every time they approve a business loan: not being paid back on time. The business owner, on the contrary, is dealing with several risks. Will the investment produce the desired returns? Will the repayments impact cash flow?
But most institutions do not care about these other risks. Being paid back on time is their only concern. The business owner is responsible for making those payments. So, in order to gauge the likelihood of the business owner making timely payments, the institution assesses the applicant’s current track record with this responsibility.
Also, most institutions’ requirements for time in business and annual revenue aren’t difficult to meet. Excellent personal credit, on the other hand, is a much rarer find. The higher your personal credit score, the more financial institutions you have to choose from.
How Is Your Credit Score Calculated?
The highest possible credit score is 850, and the lowest is 300.
- Excellent: 740-850
- Good: 680-739
- Fair: 580-679
- Poor: 500-679
- High Risk/Untouchable: 499 and under
The three main credit bureaus (TransUnion, Equifax, and Experian) calculate credit score via an algorithm created by the Fair Isaac Corporation in the 1960s. If that name sounds familiar, it’s because it inspired another commonly used term for your credit score: your “FICO” (Fair Isaac Co.) score.
The components of the algorithm are not public. So, outside of the three bureaus, no one knows exactly how a credit score is calculated.
What we do know is the criteria the bureaus factor into their calculations. It is broken down into five categories, from the most important (top) to the least (bottom):
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Credit mix
Basic Principles For An Excellent Credit Score
The path to excellent credit is surprisingly simple. Someone with excellent credit makes payments on time and takes on numerous types of debt but not too much.
If this is so easy, why do countless business owners suffer from poor credit? The short answer is they knew the rules but didn’t know how to stick to them. In other words, they didn’t know how to prevent themselves from straying from the path to excellent credit.
Here are the general guidelines for avoiding this situation:
Pay Your Bills On Time
This can’t be stressed enough. Payment history is the number one factor for credit score, so all monthly payments should be made in full and on time. Maintaining this habit automatically gives you good credit, even if you’re only managing one or a few types of debt. If you can make payments on time, you have already taken the biggest step towards an excellent credit score.
Missing just one payment, however, can cost you dearly. The total effect of a missed or late payment depends on your existing credit score and how late the payment was made. For example, if someone with a high credit score makes a payment 30 days late, the individual’s credit score could drop by over 100 points.
Automate Payments
Since payment history is so important, measures should be taken to ensure you never miss a payment. A good starting point is setting up automatic deposits with as many creditors as possible. Remembering to make payments might not be difficult now, but what about when you take on more debt?
Another way to ensure timely payments is to pay all of your bills on time, not just credit payments. Paying rent and utility bills on time gets you into the habit of paying promptly in general. Hence, you will be more likely to pay creditors on time as well.
Know That Default Isn’t The Only Option
Business owners are often forced to fall behind on loan payments due to a sudden crisis. The money that would normally be used to make payments is instead salvaged to keep the business alive. When you are scrambling to save your business, your credit score probably isn’t the first thing on your mind.
As a result, the business owner defaults on the loan and his or her credit score plummets. In the past, this might have been the only option. Today, certain institutions may be willing to help you pay off your existing debts, even when your finances aren’t in the best shape.
A default on your credit report will make it extremely difficult to rebuild your credit score and get another business loan. So, instead of immediately choosing to default amid a sudden crisis, contact financial institutions that specialize in helping borrowers pay off existing debts.
Steer Clear Of Bankruptcy, Collections, and Foreclosures
Filing for bankruptcy can reportedly lower your credit score by over 100 points. If it’s a Chapter 13 bankruptcy, it will stay on your credit report for a decade, compared to the usual seven years for all other negative credit information.
In addition to bankruptcies, legal problems like judgments, collections and foreclosures can ruin your credit score and are even harder to recover from than a default. While you can certainly rebuild your credit score afterwards, achieving a score within the “Excellent” range may be close to impossible.
Use The Right Amount Of Credit
The “Amounts Owed” category refers to the amount of debt you are currently paying back. But that doesn’t just come down to your total balance. A clearer indicator of where you stand in this category is your credit utilization ratio, or how much credit you use compared to how much credit is available to you.
A credit utilization ratio below 30% is said to be most conducive to an excellent credit score. This shows that you have plenty of credit available and are only using a little of it. Going too close to 0%, though, can actually damage your credit. It is therefore better to use credit from time to time rather than almost never.
Maintain Old Accounts
The third category, “Length of Credit History,” refers to the average age of your accounts and how often you use them. As long as you make payments on time, a longer credit history gives you a higher credit score. Longer credit history shows financial institutions that you have more experience managing debt. But you won’t reap the benefits of a longer credit history unless you use that credit, even if it’s just once in a while.
Sometimes, an institution will advise taking out a small business loan primarily to build credit history. Just a few months’ worth of timely payments can significantly raise a borrower’s credit score and open up the many benefits of good credit. Accomplishing the same thing with a new credit card would take longer and you wouldn’t be growing your business in the process.
Don’t Take On Unnecessary Debt
Applying for a series of new credit cards or loans within a relatively short time frame will temporarily hurt your credit score. Someone with little credit history might do this in an attempt to quickly establish a substantial track record of timely payments. But every new account is viewed as a new risk. And since there’s such little time between the opening of the different accounts, there’s less activity to prove that the borrower is capable of paying them off.
Institutions will also make a hard credit pull before issuing approval, which temporarily decreases your score by around five points. That adds up with every application. So, if you do apply for multiple loans within a short time frame, it should only be because you truly need the money, not because you’re trying to raise your credit score.
Manage Different Types Of Credit
There are two types of credit: revolving and installment. The first type refers to credit that can be accessed in any amount and at any time, like a credit card or business line of credit. Installments are lump sums that are paid back in fixed amounts on a monthly basis, like business term loans or student loans.
Higher credit scores are typically rewarded for those who can manage both types and show a good “credit mix.” Institutions like to see that you are not afraid to take on more debt you can clearly afford.
Check Your Credit Report Periodically
Unfortunately, credit report inaccuracies are not uncommon. Just one inaccuracy could cost you over a hundred points if it is not corrected as quickly as possible. The only way to catch these inaccuracies is to monitor your credit report on a regular basis.
Get Non-Biased Information
Rule number one for any major change on your horizon is to make sure you are listening to the right people. Once you have ascertained that you are receiving non-biased information from experienced professionals, you will feel much more secure about every move you make from then on. So, before taking any sort of action, ask yourself if you legitimately trust the source of the advice you are about to follow.
Pay High-Interest Debts First
When you have multiple debts to pay off, it’s usually best to focus on those with the highest interest rates. Paying off high-interest debts before moving on to low-interest debts ultimately reduces the total amount of money you have to spend to become entirely debt-free. If possible, you might want to consider increasing your monthly payment for higher-interest debts.
Consider Consolidation
Debt consolidation isn’t for everyone, but this doesn’t mean it should be taken off the table altogether. It’s typically meant for people who are looking to pay off multiple credit cards with somewhat similar interest rates. Someone might have one credit card with 30% interest and another credit card closer to 20%. Transferring the latter credit card will likely save a significant amount of money over the long-term. Debt consolidation can also make it much easier to remember payments.
Try To Negotiate Rates
A common trait of successful business leaders is not being afraid to ask for better rates. This applies to suppliers, electric companies, and credit card vendors. Hearing “no” over and over again doesn’t mean you will never hear “yes” the next time around. And even if you do hear a “no” from your credit card vendor, you’ll still feel a lot better knowing you asked rather than wondering what the outcome would have been.
Everyone is legally entitled to one free credit report from each of the three credit bureaus each year. This allows you to track your score three times a year by requesting one report from a different bureau every four months. But since inaccuracies are so common, it’s perfectly understandable to check your credit report more often. Requesting a credit report from one of the bureaus will not affect your credit score. It just takes more time than accessing a free report.
What Is Your Business Credit Score?
While personal credit score represents an individual’s credit activity, business credit score represents credit activity that is tied to the business itself. Much like your personal credit score, the number one rule for maintaining a great business credit score is to pay your business’s bills on time.
How Is Business Credit Score Calculated?
Business credit is calculated by the three major credit bureaus: Dun & Bradstreet, Experian, and Equifax. The most relevant score, however, is calculated by Dun & Bradstreet and is a number between 0 and 100.
Here are the primary criteria for business credit score:
- Credit utilization ratio
- Payment history
- Length of credit history
- Public records, i.e. bankruptcies and judgments
- Company size
- Risk factors in your industry
How Can I Build Business Credit?
Business credit comes from paying your bills and (possibly) loan payments on time. Therefore, the key to raising your business credit score is working with the right business partners and taking on more business partners as your business grows.
Here are some ways to accomplish both goals:
Register as Independent Company
Registering your business as an LLC or corporation separates your business’s debts from your personal credit. Your business can now take on more debt without affecting your personal credit score, which would certainly plummet from the amount of debt carried by the average small business.
This separation will also be extremely helpful in the event of a sudden crisis. Your inability to pay your bills would not affect your personal credit score. So, you’d still be able to qualify for a highly advantageous small business loan.
Pay Business Expenses with Business Credit Card
Paying your business’s bills on time will do nothing for your business credit if the payments come from a personal account. These payments must come from an account in your business’s name or a business credit card. Using a personal credit card for this purpose can damage your personal credit score, which is why the requirements for business credit cards have loosened as of late.
Make Sure Suppliers Report Payment History
In order for payments to affect business credit, your supplier must report your payment history to the major credit bureaus. Some suppliers do not voluntarily report payment histories, so it’s important to ask potential partners about this before making a commitment.
Ask Potential Lenders The Same Question
Payments to certain financial institutions may or may not affect your business credit score. Some institutions may only help you build business credit with certain products. This goes for personal credit score, too. Payment histories for certain business loans may not be reported to the three bureaus. For example, payments for a business line of credit or merchant cash advance are usually not reported.
Yes, It’s Really That Easy
In summary, building and maintaining great personal and business credit comes down to three fundamentals: Paying your bills on time, not taking on too much debt, and not using too much or too little credit.
No, doing this won’t automatically produce a perfect 850 credit score. But you don’t need perfect credit to access the most desirable business financing products, like SBA Loans and traditional business term loans from banks. A personal credit score in the high 700s should be enough to qualify. As long as you follow the basics and regularly check for inaccuracies, that’s exactly what your personal credit score will look like.
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