The Factors That Influence Your Credit Score

credit report

FACTORS THAT INFLUENCE YOUR CREDIT SCORE

  • Your pay history  (35%)
  • Revolving credit card balances  (30%)
  • Time in the bureau (15%)
  • Recent credit inquires (10%)
  • Type of credit (10%)

POSITIVE FACTORS:

  • Paid off accounts with good payment history
  • Low credit card balances
  • Limited inquires

NEGATIVE FACTORS:

  • High credit card debt
  • Line of credit debt—improperly listed
  • Late payments
  • Too many inquires
  • Judgments and Liens

PERSONAL CREDIT IS IMPORTANT

Things have changed and your personal credit is more important than ever. Because the marketplace moves so fast, many lenders have switched to a “scoring” system to evaluate credit. These “scoring” systems rely heavily on the personal credit history of business owners.

WHAT BANKS AND FINANCE COMPANIES LIKE TO SEE:

  • Clean personal credit: A credit report will be reviewed based on the social security numbers of individuals and business owners. Clean credit refers to credit reports without negative information.
  • Equal credit highs: Have you borrowed the same amount of money in the past?
  • Good : Has the applicant made loan payments on time?
  • Company financial statements: (used for business owners) Income statement—Is the company profitable? Are revenues increasing or decreasing? Balance Sheet—Does the company own (assets) more than they owe (liabilities)

Why Small Businesses Have Trouble Getting Credit

CreditApp

Only one third of small business owners were able to obtain all of the credit that their businesses need, a recent National Federation of Independent Business (NFIB) survey shows.

The survey’s finding is not surprising. Many economists, policy makers and small business advocacy groups have long explained that small businesses have a harder time obtaining credit than their larger counterparts. When it comes to accessing capital, size definitely matters.

Even among small businesses, the smaller the company, the lower the odds that it has a loan or a line of credit. Only 15.7 percent of businesses with one or fewer employees have a business loan and only 33.7 percent have a line of credit. By contrast, 56.8 percent of businesses with between 50 and 250 workers have a business loan and 65.4 percent have a line of credit.

Rather than reveal some sinister motives among bankers, however, these patterns simply reflect the economics of business credit. Fewer small businesses have access to credit than larger companies because lending to them is riskier and more expensive than extending credit to larger companies.

Default risk is higher in the small business loan market. Small businesses fail at higher rates than big businesses and changes in the business cycle have a larger impact on their profits. Because lenders cannot always charge interest rates that are commensurate with a borrower’s default risk, the most risky small business borrowers are often unable to get credit.

Lending to small businesses is more expensive than lending to big companies. Part of the problem is the fixed cost of making a loan. Some costs are the same whether you make a $50,000 loan or a $5 million loan. Therefore, profit margins are higher on bigger loans. Of course, larger companies are more likely to need bigger loans than their smaller counterparts, which lead lenders to focus on larger customers.

Additionally, evaluating small business loan applications is often expensive. Little publicly available information on the financial condition of small companies exists, and small businesses’ financial statements are not always very detailed. Small business owners’ personal finances are sometimes intermingled with those of their businesses. The very large variety of small businesses and the way they use borrowed funds make it tough to apply general lending standards. Finally, monitoring the financial condition of small businesses often requires lenders to build personal relationships with small business owners.

These economic principles have important implications for those seeking to boost small businesses’ access to credit. Encouraging more lending will require policies that take into account the greater cost and risk of lending to small companies — and why small businesses have trouble getting credit.

 

by Scott Shane

13 Myths about Entrepreneurship

Entrepreneurship Myths

13 Myths about Entrepreneurship

1. It’s all about profitability. It’s not. It’s about positive cash flow. You go bust through lack of cash, not profit.

2. Websites are the responsibility of marketing people. Wrong. Today the website is the responsibility of the CEO. Most websites are a disjointed, verbose, inward facing version of your story. Simplify your story and focus on outcomes you achieve for customers.

3. Innovation is all about thinking outside the box. Wrong. The most successful innovation involves tweaking existing products in the marketplace.

4. Growth is the same as scaling. Wrong. Lots of companies grow but fail to scale. Scaling implies growth, alignment, predictability, control and safety.

5. Around 50% of companies are small. Wrong. Defining small as 99 people or less means that 99.9% of the 27.3 million enterprises in the US are small. Only 110,000 businesses employ 100 people or more.

6. In sales, customers know what they need; it’s your job to deliver it. Wrong. Customers can be unclear and wrong about their needs; your job is to do a good diagnosis.

7. We go to work for money. It’s our highest priority. Wrong. The research supports three priorities ahead of money – Autonomy (the right to own your job), Mastery (the right to get better at what you do), Purpose (the need to connect what we do with a higher purpose). (Daniel Pink in his book Drive).

8. Big companies will almost always win against a smaller competitor. Wrong. For each specific deal, the probability of winning is related to the unique fit of skills required between buyer and seller, price point relative to the outcome desired, and the relationship between the parties. We often wrongly equate size to success.

9. Building a business to sell it one day, is all about size – being big enough to attract a buyer. Wrong. No matter how large you become, you will probably fail to exit the business if the business is: owner dependent, reliant on a few customers, filled with legacy products or is showing weak growth prospects.

10. Most employees enjoy their job and are engaged in their company. Apparently not. In the US and Canada a shocking 71% of employees are not actively engaged in their role and job according to the most recent Gallup survey. (On average the figure is 87% worldwide)

11. Most owners sell out eventually for a multi million dollar pay day. Wrong. The median price for most private company sales in the US last year was around $155,000. Only an elite few sell out for $10 million or more – 6000 per annum. (Note there are 5.9 million businesses that run a payroll)

12. Prospecting is dead. The only way to generate sales leads is to be found on the web. Wrong. Outbound calling designed to deliver insightful questions, that create awareness of need, will always work. Today’s sales professionals require diagnostic skills and the ability to carry out a collaborative conversation. The skillsets have changed but the need for humans to talk to each other has not.

13. The key to great acquisitions is to buy something that’s up for sale at the cheapest price. Wrong. The key to great acquisitions is to buy a company that quantum leaps your ability to execute your strategy. It may or may not be up for sale. The price paid should reflect an attractive ROI based on the purchase price and appropriate post acquisition costs.