January 3, 2013
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Is your small business creditworthy?
Many entrepreneurs are not aware of the tremendous impact both business’s credit and a personal credit score can both have on access to traditional financing. How easily your business can obtain credit cards, bank loans, or other financing is highly dependent on both.
Increased restrictions on credit in recent years means that more banks and financial service providers will take your personal credit into account when assessing your business’s creditworthiness.
Here are several personal and business credit tips to keep in mind before you apply for a small business loan or traditional financing.
Personal Credit Tips
According to myFICO.com, your personal credit score is determined by a number of different factors combined into five categories. Each category carries a specific weight in determining your credit score – your payment history, for example, weighs much more than the amount of new credit you have.
The importance of each category can vary depending on your personal credit history. Here is the general breakdown of these categories and their importance based on percentages:
1. Payment history (35%) – Whether or not you have paid your credit accounts on time is the most important factor that credit companies look at in determining your credit worthiness.
2. Amounts owed (30%) – The amount that you owe is not, in itself, as important as the ratio of amount owed to total available credit. If most of your credit is tied up in a high balance that can lower your credit score.
3. Length of credit history (15%) – Making payments on time and keeping a low balance-to-credit ratio can make up for a short credit history.
4. New credit (10%) – Opening several new credit accounts in a short time period is considered risky behavior by the credit bureaus.
5. Types of credit used (10%) – This includes credit cards, retail accounts, installment loans, auto loans and mortgage loans.
Business Credit Tips
When you start a business, you may have to rely on your personal credit to obtain financing or business credit. However, you should work to separate your personal and business credit as early as possible by opening a business checking account and applying for a business credit card.
As your business grows and begins to have real revenue and costs, it is important to separate your financial records and have business-only financial statements. These will be required not only for tax purposes but also for interactions with banks if and when you apply for a loan.
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