Veterans are well trained in the art of overcoming obstacles; military service capitalizes on the courage and bravery of its members to tackle and overcome any challenge head-on.
Your veteran-owned small business will encounter its own set of obstacles, and the success of your business may very well depend on your ability to surmount them.
One of the foundational hurdles every small business has to overcome are the muddy trenches of credit scores and the effect they may have on your business loan. We'd like to take you on a journey. This will be the first of several posts about credit scores and how they affect getting a small business loan. Get the credit score series of posts straight to your inbox by subscribing to the StreetShares blog.
Personal and Business Credit Scores Explained
Credit scores are the numerical representation depicting a borrower’s creditworthiness – that is, their ability to pay back a loan. These sources are useful for lenders to judge whether or not they think they’d be able to afford the risk of loaning money to you or your small business by showing them how financially trustworthy you are.
When learning about personal or business credit scores, it’s important to look at a breakdown of how those scores are generated. First we’ll look at personal credit scores, or your FICO.
Personal Credit Scores
Your personal FICO credit score is represented by a three-digit number ranging between 300 and 850; as you’d assume, the higher the number, the better. Each financial institution is different and have different minimum FICO requirements. For example, at StreetShares, our minimum FICO score requirement is 600. This credit score number is generated from several factors totaling to 100%:
- Past Payment History 35%: how you’ve paid back past accounts (late or on time)
- Credit Utilization 30%: essentially the total number of accounts you have open and how much you owe on each of those
- Length of Credit History 15%: looks back to the first account you’ve ever opened, your newest accounts opened, and calculates the average length of time your accounts have been opened, or your “credit age”
- Credit Mix 10%: a summary of the types of credit you have open, such as a car loan, a mortgage, credit cards, retail accounts
- New Credit 10%: looks at if you’ve opened multiple new accounts at the same time (as opening several in a short time shows a greater risk to the lender)
Business Credit Scores
Many people are surprised to know that your business can have its own credit score, separate from the business owner's personal FICO score. Business credit reports have a few differences. Some of the important factors in generating a business credit score are:
- Past Payment History
- Credit Utilization
- Length of Credit History
- Credit Mix
- Available Credit (the total funds you can still access on your credit cards or revolving loans)
- Frequency of Inquiries (every time you open new credit, those companies request your credit score, resulting in “inquiries”).
Unlike with personal credit scores, the levels of importance in the breakdown percentages vary. Most business credit reports are generated by a few major companies: Dun & Bradstreet (D&B), Small Business Financial Exchange (SBFE), Experian, and Equifax. Each company defines the major determining factors of your credit score in a unique way. For example, D&B heavily weighs the promptness in which you’ve paid back past credit. Experian also looks at past payment history, but they see credit utilization as another important factor. By contrast, Equifax weighs the size of your company along with the length of credit history and your available credit as highly important. Knowing the ins and outs of these credit bureaus can help you be strategic in achieving the highest possible score. If you're a small business owner, be familiar with how to build your business credit.
How Credit Scores Affect Your Small Business Loan Application
This post isn’t simply meant to define credit scores. Ultimately, how does this information apply to your veteran-owned small business?
It's important to note that when you are applying for a loan, lenders consider both your personal credit score AND your small business credit score. Lenders will take into account your FICO score as a personal guarantee. If you have a high score, they will be more willing to assume that you can manage your funds appropriately; whereas, a lower score might indicate you cannot handle what you already have.
The sooner you take steps to increase your credit score, on both a personal and business level, the better your chances at getting the type of loan that is the most beneficial to you in the long run. It’s common knowledge that the higher credit score you have, the better rates you will receive on your loans.
Consider an example* when comparing the same loan amount of $25,000 and the same three year term, with different credit scores and therefore different interest rates. You'll find with a higher FICO score, you have a lower interest rate and will be paying less interest over time.
For this example,* if your score is less than 700, you're paying $2,600 more in interest than you would if you had a FICO score of 750 or more.
How StreetShares Looks at Your Credit Score
At StreetShares, we take your personal and business credit score into account when analyzing how much we can lend. We typically require a personal credit score of 600 for lines of credit and term loans. Click here to get started with your loan application. To continue learning more about your personal and business credit scores, subscribe to our blog to get the credit score series straight to your inbox.
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