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S.T.E.P.S. - Smart, Tailored, Event-Driven, Packaged Solutions
provided by Women's Financial Network at Siebert
Qualifications and Credit
History -- Part V
If your small business is a sole proprietorship, there is no difference between your personal credit history and that of the business for loan purposes. If you do not have an established credit history, credit card, or loan in your own name, it will likely be extremely difficult to secure business financing. Your credit history gives the lender a picture of your money management skills and responsibility, so it is key to your success in the loan process.
On the other hand, if your small business is a corporation, partnership, or
trade company, the lender looks at the business credit history.
In this section we'll cover each of these possibilities and
look at how general credit affects your eligibility for a
loan in each case.
Qualifications for sole proprietors
When it comes to extremely small business start-ups, it is the entrepreneur's credit as an individual that will be scrutinized. So in this case, when we talk about small business loans, we look at personal credit history and personal assets. Loan officers will evaluate you with respect to the following:
- Good character - Are you on time? Professional?
- Whether you have demonstrated historical earnings sufficient to repay the loan
- Ability to provide sufficient collateral to adequately secure the loan
- Personal credit history
Qualifications for corporations, partnerships or trade companies
If on the other hand your small business is a corporation, partnership, or trade company, the lender looks at the business credit history - assets, inventory, accounts receivable, accounts payable, real estate, and payment history.
Keep in mind that it is not the type of business that matters, but its creditworthiness, financial performance, and collateral pledged that does.
Credit
Credit may be defined as the record of how a person has borrowed and repaid. It serves as a national guideline to establish an individualˇ¦s creditworthiness, which helps to decide whether to extend loan approvals, for example. Most of us have established some form of credit through credit cards and small personal loans. Your personal and business credit can make or break your business when you need a loan -- good credit is a must. It is absolutely essential to be familiar with you and your company's credit histories and to monitor them carefully for errors. In addition, you should have a solid understanding of the guidelines that govern the credit system and be able to address the following with confidence:
- Developing your own credit history
- Understanding your and your company's credit profiles
- Repairing poor credit
Let's look at each of these more closely now.
1. Developing your own credit history
Unless you have major assets or collateral to guarantee your loan, not having a credit history can be as big a roadblock as having a poor credit history. If this is your problem, it's important to start building credit as soon as possible. The two easiest ways to establish credit are:
- Borrow from your bank
- Open charge accounts (responsibly!)
Borrow from your bank
If you have no credit history, one easy way to develop one is to borrow responsibly from your bank. You can do this through small, short-term loans such as CD's. For example:
- Borrow $2,000 and put the funds in a CD with a maturity of sixty days. In sixty days take the $2,000 out of the certificate of deposit plus the interest earned and repay the full amount of the loan. You are now on your way to a healthy credit report.
- Then, do the same thing with $3,000 for ninety days, continuing to pay on time and in full.
- If you repeat the process with larger amounts, you credit will build and you'll be a better candidate to receive a loan in the future.
Open charge accounts (responsibly!)
Responsibly maintaining charge accounts is another way to establish a good credit history in a relatively short period of time. If you do not currently have a charge account in your own name, you can probably still build credit by doing the following:
- Open a charge account at a small, local retail store. Buy something small on credit. When the bill comes, pay the bill on time. After you've built this initial "good credit," go to a larger retailer and repeat the process.
- Soon, you can apply for a major credit card. Buy a small item, put the credit card away in a drawer, and pay the bill on time or before it's due. This process will allow you to gradually build credit and pave the way for a higher credit line in the future.
HerTip: You can follow the same strategy to develop credit for your business using the business' name on your new accounts.
Understanding your and your company's credit profiles
A credit profile is a picture of how you paid back the companies from whom you borrowed money, or how you and your company have met other financial obligations. There are five categories of information on a credit profile:
- Identifying information
- Employment information
- Credit information
- Public record information
- Inquiries
Each metropolitan area has one or more credit reporting bureaus that track your credit history. Banks and other lenders report to these credit bureaus on all of your debts. The three main credit bureaus are:
- TRW - 1-888-397-3742
- Trans Union - 1-800-888-4213
- Equifax - 1-800-997-2493
- Q-Space
You can contact them directly for a copy of your complete credit report. If you haven't already, you should do so as soon as possible and check it carefully for any errors.
HerTip: No matter what, donˇ¦t ever let errors on your credit report go. Begin repairing your credit today!
2. Repairing poor credit
Don't despair if your credit is not good and you have been turned down for a loan. Credit repair is always feasible at any time. Review the section on How to Develop Your Own Credit History and start anew. Budget your expenses, and pay down current debt on time.
Extenuating circumstances and errors
Generally, problems that you'll find on your credit report fall into two categories.
- Extenuating circumstances means an unusual and unexpected situation like a job loss. If that is the case, you should try to explain the nature of the circumstance and do your best to convince underwriters, in writing, that this situation will not happen again.
- An error on your credit report means that something is blatantly incorrect. If you find an error, contact the creditor and obtain a letter stating that the bill was actually paid, and ask the creditor to rectify the mistake. Take that letter with the corrections to the three credit bureaus and have them make the corrections to their files. Once you do this, it should take about seven days to clear your file.
Continue to: Part VI. Types of loans
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