By Matthew Gillman, Business Financing Expert & SMB Compass Founder
No matter what type of financing you’re trying to get, lenders will commonly look at your personal credit history to determine your creditworthiness. You may submit your company’s comprehensive business plan, cash flow statement, and other documents that prove your ability to repay debts, but for most lenders, having a low personal credit rating may be a red flag.
If you’re planning to get any type of financing for your healthcare practice this National Credit Month, you might want to revisit your credit profile now just so you know where you stand.
What is a personal credit score?
Your personal credit score is a measure of your creditworthiness – that is, how likely you are to repay your debts. A high credit score means you’re a low-risk borrower, which helps lenders decide whether to give you a loan or not. If your credit score is low, it may be difficult to get approved for a loan.
The credit score ranges anywhere between 300 and 850, which is determined by credit scoring companies like the Fair Isaac Corporation (FICO). Also known as the FICO score, your credit rating consists of five elements: payment history, total incurred debts, length of credit history, credit mix, and new credit.
- Payment history (35%)
Your payment history is the main element that tells whether you’re paying your bills on time or not. It’s a summary of all your previous transactions and hard inquiries. Bad records stay in your credit report for seven years from the date of your first missed payment.
- Total debts (30%)
Total debts account for all the individual loans you acquired in the past–from personal loans to credit card balances to mortgages. Your level of debt usually predicts your future credit performance, meaning all your existing debts will impact your ability to pay your monthly obligations.
- Length of credit history (15%)
Lenders will also assess your risk based on the length of your credit history or your track record in making payments to creditors. The longer your credit history is, the more experienced you become at using credit.
If you want to determine the average length of your credit history, simply divide the ages of your oldest and newest accounts by your total number of accounts.
- Mix of credit types (10%)
Creditors are also considering your credit mix. Lenders want to see if you are experienced in using different types of credit such as auto loans, mortgage loans, line of credit, or credit cards. They want to find patterns in your payment behavior: are you consistently paying your bills on time no matter what type of credit you owe? This is particularly important if you are applying for a new type of credit for the first time.
- New credit (10%)
Have you been shopping around to get as many credit accounts as possible? You have to know that lenders will know if you’ve been applying for multiple loans at the same time. Opening new credit will lower the average length of your total accounts.
Why are lenders qualifying you based on your credit score?
There are a few reasons why your personal credit score is important when applying for business financing. First, lenders use your credit score as a way to assess risk when considering you for a loan.
Aside from that, having a high credit score can give you access to better loan terms and rates. Lenders are more likely to offer favorable interest rates and terms to borrowers with high credit scores because it shows that you’re a responsible borrower.
This also means that lenders can quickly get back the money they loaned you. You can save on costs and access funds much faster from a long-term perspective.
When you have a low credit score, you are considered a high-risk borrower in the eyes of creditors. It indicates that you’re not paying your dues on time or don’t have a credit history to prove you’re paying diligently.
Most new businesses have a hard time getting approved for a loan because they don’t have a credible credit report available at their disposal. However, this doesn’t mean that they can’t get financing.
If you are eyeing to grow your healthcare business, either through expansion, relocation, purchasing new equipment, or hiring new staff, making sure your credit is in good shape will go a long way in securing capital.
How to improve your personal credit score
Do you have a poor personal credit rating? You can do something about it. Here are a few ways to build or improve your credit score.
- Start paying your bills on time
Since you want to show lenders that you are a responsible payer, make sure you don’t miss any dues going forward. There’s no better strategy than to start becoming more diligent when repaying your debts or staying on top of your monthly bills. Pay as soon as you receive your billing statement and don’t wait for the due date.
- Use your credit card wisely
If you have a credit card, it’s best to aim for 30% credit utilization. This means that your outstanding balance must be 30% or below your total credit limit. People with high credit scores typically keep their credit utilization at 7%.
- Consolidate your loans
If you’re having a hard time keeping up with your loan repayments, it’s best to consolidate them. Getting alternative financing to cover all your debts can help ease the burden of paying multiple creditors at any given time. This ensures that you won’t miss loan repayments in the future, since you will only have to pay one creditor.
- Dispute any errors in your credit report
Some borrowers are paying their bills on time but are shocked to see a low credit rating. This might be because of errors in your credit report. Before you start applying for a loan, make sure you check your credit report and see if there are any errors with your name, contact information, address, or activities wrongfully recorded under your account.
The Federal Trade Commission revealed in a survey that one in five people has encountered an error on at least one of their credit reports. Make sure you dispute any errors in your credit report so you won’t encounter any problems when getting financing.
Growing your healthcare practice involves capital, but you might have a hard time securing one with a low credit score. Request a copy of your credit report from companies like Equifax or Experian to know where you stand.
About the Author
Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.