• Understanding Credit Reports vs. Credit Scores

    When seeking a business loan, your company's credit health is one of many factors a lender will review. However, you may not know that, as a borrower, your personal credit score matters as well. Every individual that is a personal guarantor on a 504 loan must submit his or her personal financials to assess the perceived level of risk for the lender. This assessment includes personal credit scores.

    Many people use the terms credit score and credit report interchangeably, but they are very different things. Understanding each one and how they are related will make you a better informed borrower. Very simply, a credit score is a numerical value assigned to represent your creditworthiness, while a credit report is a history of how well you have repaid your debt obligations.

    Credit reports are compiled by one of three major agencies: Equifax, Experian and TransUnion. The information includes the types of credit you use, the balances and available credit for credit cards and loans, payment history, any accounts sent to a collection agency, bankruptcies, tax liens, and court judgments.
    A credit score is a number, and the most widely known and used is FICO. To create a credit score, FICO uses the information provided from a credit reporting agency (information in your credit report) and applies a complex algorithm to generate a numerical credit score. FICO values five factors found in a credit report. These are payment history (35%), debt amount (30%), length of credit history (15%), mix of credit (10%), and new credit (10%). Other credit scores use similar information, so a good FICO score means other scores should be comparable.

    Ultimately, this score helps a lender predict a borrower’s behavior in regard to the loan.  FICO scores can range from 300 to 850, with under 400 being quite low and over 700 indicating a healthy score. For a lender, the higher your score, the less likely you are to default or make late payments.

    Understanding the difference between your credit report and credit score allows you to take the steps needed to improve both. Cleaning up your personal credit history will lower your level of perceived risk and increase the chances of a lender approving your business loan, as well as make the whole process go more quickly. Because it takes time to clear up any credit problems, the time to start is before you apply for financing.

    Don’t lose a loan because you have a credit problem that is easily fixed, and don’t wait on financing because you are waiting on credit agencies to update your credit report.

    Contact Community Business Finance to discover how our 504 Loan Program will provide you the financing you need with competitive terms that work best for your business.

    In Texas call Bill Ebersole at 713-457-1650, ext. 201, or email him at bill@communitybusinessfinance.com.

    In Louisiana, call Jeanne Bergeron at 1-800-462-1017, or email her at jeanne@communitybusinessfinance.com.

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