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Credit Scores for Small Business Financing

We recently hosted a Lunch & Learn where TS Institute‘s Kyle Osborne discussed the role personal credit scores play in loan and financing eligibility for small business owners. Because so many entrepreneurs need capital to start, continue, and expand operations, it’s important to know what scores indicate and how to improve them.

What’s my “number” and what does it signal? Evaluating personal credit scores helps potential lenders predict future repayment behavior. Here’s a general rule of thumb for what your score indicates and the implications:

• Below 650 = Bad This score indicates a high-risk borrower, and getting a traditional bank loan or SBA loan is unlikely. Other financing options exist (for example, microloans); however, these come with high interest rates to mitigate perceived riskiness. • 650-680 = Okay These scores indicate moderate risk to lenders. Loans are possible, but expect to pay high interest rates. Scores of 650 and 680, respectively, are generally the bottom thresholds SBA and banks will consider. • 680-800 = Good  Credit scores above 680 are viewed as low-risk. People in this range can comfortably anticipate loan approvals and favorable interest rates. Above 800 = Excellent These individuals are considered first-rate borrowers. Expect to be offered the best interest rates and most favorable terms on available financing options.

How is my score calculated and how can I build or improve it? Credit scores are calculated on five factors:

Payment history (35%)- Pay your bills on time and stay current on every account. • Amounts owned (30%)- Don’t owe too much money and always leave some credit under-utilized. • Length of credit history (15%)- Keep older accounts open and in good standing, and don’t unnecessarily apply for new credit. Type of credit utilized (10%)- Manage diverse types of credit in your overall portfolio (revolving, installment, mortgage, etc.). • New credit (10%)- Don’t apply for several credit cards or revolving loans (considered “hard” inquiries) over a short period. This hurts your score. Shopping for mortgage, auto, or student loan rates (“soft” inquiries) is fine.

If you want to know your current credit score, Experian, Equifax, and Transunion (the three major credit reporting agencies) all offer free annual reports. They also provide notifications when your score is checked or changed. Dispute any discrepancies you find, as these corrections increase your score. Building and bettering a credit score takes time, but good practices and regular monitoring result in improvements.

For help with credit scores, loans, or financing, contact the Iowa Western SBDC at (712) 325-3376. We are a free service and offer one-on-one consulting to startups and small businesses in Southwest Iowa.

(Photo credit: Anssi Koskinen / Flickr)

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