Do you know what your credit score is?
This is one of the first questions I ask startup or current business owners when they come to me to talk about financing for a new business or a business expansion, and all too often the answer is “no,” or “I looked a few years ago, but I’m not sure now.”
Most often business owners or owner wannabees need to fall back on their own resources and credit for financing. This is where credit scores come in because even with established businesses, financial institutions are partly basing the decision on whether to loan or not on the owner’s personal creditworthiness.
A credit score is a shorthand representation of one element of what bankers call the five Cs of credit: Character. (The others are Capital: you’re not going to get 100 percent financing, so expect to invest in yourself; Collateral: What assets you have that could be sold as a secondary source of payment; Capacity: your company’s ability to repay the debt; and Conditions: the general economic conditions affecting your industry and company).
Character is an indication of your trustworthiness as a borrower. So, do you pay your bills on time, have other organizations trusted you enough to extend credit to you, how much have they lent you, how much have you used, and how long have you had credit? All these variables go into the calculations that make up a credit score.
The whole concept behind credit scoring is that past behavior is a good predictor of future behavior. So, if you’ve been a reliable credit customer in the past and have paid your bills and not overextended yourself there’s a good indication you will continue to behave that way in the future. That makes you a good credit risk.
Now all of us have many credit scores. There is no one number that is associated with you as a credit score. Scores differ based on the company that is providing it and the algorithm used in calculating it. Most people have heard of FICO, and many people use that term to mean “credit score.” FICO really stands for Fair Isaac Corp., which is the company founded by Mr. Fair and Mr. Isaac back in 1956 that developed a model for credit scoring. While not a credit bureau itself, it uses the credit reports it obtains from credit bureaus, organizations to whom banks and stores report your credit behavior, to generate its scores, and is the leading U.S. provider of credit scores.
In actuality, any FICO score you obtain is the product of only one credit scoring methodology, and there are competing methodologies offered by different companies, including the credit bureaus themselves. So, the credit scores you get differ from each other based on their source and are most probably different from the one the bank you are applying to for financing will use. Even within FICO, there are dozens of different versions of your credit score based on what kind of credit you are applying for because FICO sells its data analytics products to a wide range of users who want to weight certain variables in your credit history differently. Having said that though, there should not be wide variations in the variety of your credit scores obtainable from different sources or for different purposes. They should all be relatively in the same ballpark.
So, the point is not to get hung up on a single number, but to look at the range of scores you have and their trend over time. You can easily obtain your credit score for a fee from either FICO, the various credit bureaus (Experian, Equifax or TransUnion), or for free from Credit Karma and various other sources, including your credit card company. You are also entitled to one free credit report, not the score, annually from each of the credit bureaus.
And you can improve your credit score. It takes some time and determination, but it is highly doable. There are various ways to do this (examples include taking out a small manageable loan with the purpose of being able to pay it on time and generate a history, getting a secured credit card, or becoming an authorized user on another person’s card) as well as companies that can help you, but basically your goal in improving your credit is to build up a picture of yourself as a customer who pays on time and who does not draw too heavily on available credit.
The point of all this is that your personal credit score, how you monitor it, and how successful you are in improving it, is one of the keys to obtaining financing for your business. It’s well worth it to be aware of how this works to maximize your chances for business success.
Dennis Boyd is director of the West Hawaii Small Business Development Center. Hawaii SBDC Network is funded in part through the U.S. Small Business Administration and the University of Hawaii at Hilo.
Excellent article! Startups and very young companies can’t avoid the lender using personal credit as part of the credit application, but now they can more easily have their business credit score from Experian included based on bills you are probably already paying. eCredable helps small business owners include their phone, internet, and utility bills in their credit file to quickly build a score. After you have been in business for 2-3 years most lenders will not require you to personally guarantee the loan or credit line any more – but only if you have a strong business credit score.
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