Improve Your Credit Standing & Obtain the Financing That’s Right For You
United Capital Source puts our business financing experience to work to improve credit standings and acquire financing for those who otherwise find credit or loans out of reach. We provide 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.
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Small business loans provide funding that can be used for a myriad of purposes. Some common purposes of business loans include purchasing equipment, ordering inventory, renovating a property, and paying off other existing debts. You can access amounts as low as $10,000 and as high as $10 million.
With most products, the amount you are given must be paid back within a set time frame. Each business loan product has a cost, so you end up paying back more than you borrow. The amount paid back to the lender can either be determined by an interest rate or a factor rate.
The requirements and repayment structure are different, depending on the product you choose.
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 fewer 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 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.
Credit bureaus create your credit report by collecting information about your credit usage after opening a credit card or applying 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.
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 monthly payment size 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. You decided to start the business. All in all, entrepreneurship is really another personal financial venture.
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.
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 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 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 making 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.
Though most credit cards and credit lines 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 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. 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.
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.
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 the 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. 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.
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 achieves them differently. 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 comprises 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 one free credit report from each bureau every year. Taking advantage of this law is crucial for improving your credit use 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.
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 will 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 to ensure that credit scores are calculated through a standardized procedure. The formula incorporates numerous elements of your credit history and is, therefore, fairly complex.
The name “FICO” comes from the Fair Isaac Corporation, which designed the algorithm in the 1960s. Its primary purpose is to determine the likelihood of a borrower defaulting on debt payments within the span of 18 months. Therefore, borrowers with lower credit scores are 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.
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:
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 various 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, newly impeccable payment history can still build your score back up. In fact, all late payments get erased from your credit report 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.
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 credit lines 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.
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.
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.
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.
However, checking your own credit score 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.
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. Therefore, the algorithm 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. However, the likelihood of missing a credit card payment is higher because there are few (if any) immediate consequences. Hence, a borrower whose only account is a car payment would not score well in the credit mix department.
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 various accounts, this is really all you have to do to ensure an excellent credit score. You must check your report, even if you have no reason to believe an error has been made.
A 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. Like annual revenue and time in business, other factors are also significant 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. This guide will 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.
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:
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 refer 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.
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 a small business is just another personal financial venture, much like the aforementioned examples of debt.
Based on that logic, an applicant’s track record with personal debts is indeed an accurate indicator of how they 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. However, their highest borrowing amounts and most advantageous terms are only available for borrowers with good credit at the very least.
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. 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. On the other hand, excellent personal credit is a much rarer find: the higher your personal credit score, the more financial institutions you have to choose from.
The highest possible credit score is 850, and the lowest is 300.
The three main credit bureaus (TransUnion, Equifax, and Experian) calculate credit scores 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):
The path to excellent credit is surprisingly simple. Someone with excellent credit makes payments on time and takes on numerous debt types 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:
This can’t be stressed enough. Payment history is the number one factor for a 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.
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.
Business owners are often forced to fall behind on loan payments due to a 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 their 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 crisis, contact financial institutions that specialize in helping borrowers pay off existing debts.
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 afterward, achieving a score within the “Excellent” range may be close to impossible.
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 than 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 seldom.
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 a credit history. 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.
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 establish a substantial track record of timely payments quickly. 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 an approval, which temporarily decreases your score by around five points. That adds up with every application. So, if you 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.
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 paid back in fixed amounts every month, 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.
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 regularly.
Rule number one for any major change on your horizon is to make sure you listen 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 action, ask yourself if you legitimately trust the source of the advice you are about to follow.
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.
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 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.
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.
While a personal credit score represents an individual’s credit activity, a business credit score represents credit activity 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.
Business credit is calculated by the three major credit bureaus: Dun & Bradstreet, Experian, and Equifax. However, the most relevant score is calculated by Dun & Bradstreet and is a number between 0 and 100.
Here are the primary criteria for business credit score:
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:
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 beneficial in the event of a 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.
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.
Your supplier must report your payment history to the major credit bureaus for payments to affect business credit. Some suppliers do not voluntarily report payment histories, so it’s important to ask potential partners about this before committing.
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 a 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.
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.
Fraud Disclosure:
Please be aware that individuals have been fraudulently misrepresenting to business owners (and others) that United Capital Source, Inc. (“UCS”) can assist small businesses in receiving government grants and other forgivable business loans, when in fact those grants or loans do not exist or are not available. These individuals have ulterior motives and are engaging in the unauthorized use of the names, trademarks, domain names, and logos of UCS in an attempt to commit fraud upon unsuspecting small business owners.
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