Today, all SME lenders begin their application process by checking the business owners personal credit score. Whether applying for $10,000 or $500,000 if the number is too low the applicant is declined. If the number is high enough there could be an approval within hours and a payout within days.
There are three credit bureaus, Equifax, Experian and Transunion and they each receive the same information. The two main credit reporting agencies; FICO and Beacon use this information in a variety of ways to establish a credit score depending on the needs of the lender. An individual has no idea under which model they are being judged or how that number is derived.
Credit reporting agencies use the latest in analytic software to predict consumer behavior. One of the factors affecting this number is the credit utilization rate and 35% is considered an ideal level. Business owners forced to use used credit cards to access working capital typically exceed that level quickly.
Under the FICO system the highest score possible is 850 (nearly impossible) and a “good number” is 671. Lenders set their own lowest acceptable number and that can change and typically does over time. This number can also have a significant effect on any amounts, terms and rates offered to any approval.
All is not lost for business owners with a low credit score. They can still access working capital it just requires some effort. It is also important they know what their credit score is and why it is what it is and what it takes to improve it. I have a link on my website to “”101 Powerful Tips for Improving Your Credit Score” by Pascale Hansen.
Those of us who work with SME business owners should start looking at a low personal credit score number as normal and a challenge and try to focus on the business itself. There are and will be lots of up-and-coming businesses with good owners who suffer from a low credit score number. Together we can still show them how to grow their business, raise their number and successfully venture beyond the horizon.
