For a business loan approval, the owner's personal credit scores play a large role.
Business lenders primarily look at the FICO scores of anyone owning 15% of more of your business. FICO scores have a scale from 300 -850. Let's take a look at what determines your Credit Score.
Payment History and Public Records accounts for 35% of your score and is broken down into three areas:
1 - Mortgage accounts (20%) - best is one open account. Two open mortgage accounts is okay, but any more works against you..
2 - Installment accounts (30%) - installment accounts are cars, furniture, student loans, etc. The best is two open accounts.
3 - Revolving accounts (50%) - revolving accounts are credit cards, department stores, etc. The best is three open accounts.
To optimize your scores you should have five open accounts that are “paid as agreed” for over a 24 month period. Paying your bills on time is the single best thing you can do to raise your score.
Outstanding Amounts of Debt Owed accounts for 30% of your score and is broken down into three areas:
1 - Mortgages (20%) - Best here is no more than 80% loan-to-limit for all open accounts. Loan-to-limit is not loan to value. The credit agencies have no way of knowing the value of your real estate. The credit agency can only see your loan-to-limit. For example, if your mortgage started at $250,000 and next month you are at $249,900, then you are at 99 % loan-to-limit.
2- Installment (30%) - Best is no more than 60% loan to limit for all open accounts.
3- Revolving (50%) - Best here is no more than 30% loan to limit for all open accounts.
Length of Account Credit Histories accounts for 15% of your score. This is the age of your accounts. The value used in calculating your score is the date your credit history on this account was opened. The older the credit file opening date is the better it is for your credit scores. Credit histories are reported for seven years, so keep your account open longer if you want better scores.
Obtaining of New Credit accounts for 10% of your score. Do not open many new accounts close to each other. New credit lowers your score.
Types of Credit Currently in Use accounts for 10% of your score. Best is one mortgage, two installments, and three revolving accounts. Too many of any type will lower your score. Public records such as liens or judgments will make your score go down. In addition, inquiries are a 3 to 5 drop each in your scores.
After you complete a business finance pre-qualification test, we will detail how to optimize the personal credit scores of all the owners of your business. We have found it possible to raise scores by as much as 100 points over a 90 day period to help you get approved for business loans.