When evaluating loan prospects, the banks will take a look at the “five C’s (character, capacity, capital, conditions, and collateral), but they also pay a lot of attention to your credit scores. The importance of a good credit history has grown over the past decade with the increased use of credit scoring by lenders. Credit […]
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When evaluating loan prospects, the banks will take a look at the “five C’s (character, capacity, capital, conditions, and collateral), but they also pay a lot of attention to your credit scores. The importance of a good credit history has grown over the past decade with the increased use of credit scoring by lenders. Credit scoring is a computerized loan-evaluation method that lenders use to statistically predict how risky it is to lend money to someone.
The scores are based solely on information in consumer credit reports maintained at the credit-reporting agencies. Therefore, it is important to know what is in your credit report. Many times information is incorrect and can negatively affect your credit score. Everyone is now entitled to one free credit report per year. You can obtain a free credit report at www.annualcreditreport.com. However, if you want your credit score, you’ll need to pay a fee.
Another credit issue is whether you started out undercapitalized, used credit cards, and/or had too much debt. Undercapitalization means not having enough cash available if needed. Lenders suggest having three to six months of working capital on hand at all times to prepare for bumps in the road. Perhaps sales are slow for a couple of months or your business faces an unexpected expense. Have you weathered any of this? How did you handle it?
When evaluating credit histories, lenders look at whether debts have been repaid on time, the amount of credit extended, the relationship between total credit available and current credit balances, and the number of recent applications for credit. Credit balances approaching the credit limit may indicate that a borrower’s ability to take on more debt is limited, even if there are few or no late payments in the credit history.
A business cannot grow without good credit. It is always costly to grow a business or “take it to the next level.” Without proper funding, it can be nearly impossible. It may be as simple as securing terms with your supplier until you are paid by a customer. It could be a loan to purchase a larger building. Whatever the case, credit is important.
Strategies to improve credit
1. Correct any mistakes on your credit report — this must be done in writing
2. Pay your bills on time
3. Reduce the amount of your debt
4. Don’t open new accounts
5. Pay off higher interest rate credit cards first
Help available
If you are looking to start a business or have a business that needs some assistance, the Small Business Development Center (SBDC) at Onondaga Community College (OCC) can help. Professional business advisers are on staff to offer free and confidential one-to-one help in preparing a business plan or a marketing plan, making financial projections, or finding funding sources, government procurement, and research assistance. Please visit our website at www.onondagasbdc.org.
Nancy Ansteth is a New York State certified business advisor with the SBDC at OCC. Contact her at anstethn@sunyocc.edu or (315) 498-6072.