Are you a business owner or an aspiring entrepreneur in need of capital? Your prior relationship with credit may stand in the way of financing. Lenders look down on borrowers with a tarnished track record, and a low score from FICO and VantageScore depicts you as a high-risk applicant. Discover the best tips and tricks to achieve your goal.
As regards personal score, many organizations use a threshold of 650-660. For example, this is true for some banks and credit unions. Before applying, research the eligibility requirements and alternatives. For instance, instead of a traditional loan, you may qualify for a microloan. It is also possible to improve your chances with collateral or a co-signer — discover more below. Finally, you may be able to boost your score through professional repair — check The Credit Pros reviews for more information.
Overview of Requirements
Step 1. Determine Where You Stand
If you are applying for startup capital, or your company has only been around for less than a year, the lender will only look at your personal score. You can view it on My FICO or with the help of apps like Credit Sesame. This metric is dynamic — it changes every month as new information gets added to your reports.
Every report is a description of your borrowing experience, but these documents are not always correct. According to the FTC, around 20% of Americans have mistakes in their files. This results in skewed scores that make qualifying for loans complicated. Thus, your first step is to understand if your current status is a true reflection of your experience. For example, you may notice medical collections on credit report that appeared by mistake.
Scores in FICO and VantageScore are a result of a five-factor calculation. They reflect the timeliness of your previous payments, the total amount you owe, the length of your history, new accounts and experience with different forms of lending — for example, cards, consumer loans and auto loans. All of this data is contained in the reports you can download from www.annualcreditreport.com.
Request files from Experian, TransUnion, and Equifax as these sources are independent from one another. Then, scrutinize the documents carefully to search for any disputable information. Under the Fair Credit Reporting Act, the bureaus are obliged to make sure the information is viable. If you see wrong amounts, someone else’s accounts or events that never happened (for example, bankruptcies or missed payments), these items can be corrected through the dispute procedure. Once they are deleted, your score will jump automatically.
If there is nothing to rectify, you can still improve your status by working with the score components. Make all payments on time, use less of your limits across all credit cards (10% is ideal), and use Experian Boost to add positive information. If you get a new card or an extension of your current limit, this will also bring down the utilization to help you reach the 10% threshold.
Step 2. Review Accessible Forms of Financing
While an unimpressive score is a major obstacle, it does not entirely prevent you from securing capital. There are still a few things you can do to improve the chances. The options below will help you mitigate the risk in the eyes of the lender or find more accessible options.
- Offer Collateral
You can use your personal assets or accounts as collateral to make the loan less risky for the financial institution. At the same time, your own risks will increase, as the lender will have a right to seize your property in the event of non-payment. Do not use collateral you would not feel comfortable losing and study the terms and conditions of the agreement very carefully.
- Invite a Co-Signer
If someone classified as a low-risk borrower signs on the dotted line, they will take part of the responsibility for the debt. In the future, if you fail to pay, they will be responsible for meeting the obligations. Of course, this is the worst-case scenario, but it is still important to evaluate your risks.
These alternative options normally come with less rigorous requirements, and they are often tailored to the needs of specific groups, such as women with a poor history. You can get approved quickly, but the interest rate will be higher — online lenders are notorious for their APRs.
In addition, the repayment period is shorter. Note that you will still need to provide proof of your solvency, such as employment information. If the arrangement includes a personal guarantee, your own score and assets may be at risk if your business fails to meet its obligations.
- Merchant Cash Advance
This option works for companies that accept credit card payments. You receive a lump sum from the lender and then pay a share of your daily transactions until the debt is paid off. The cost (in this case, the factor rate instead of the interest rate) will also be high.
- Invoice Factoring
Does your company have accounts receivable? Find a factoring provider. Before the customer pays, you will get a percentage of the invoice amount. The company will manage the payments and provide the remaining balance after the invoice is paid. Then, you will pay the factoring commission depending on the terms and conditions of your agreement.
To Sum up
Your options are not limited to conventional loans from major banks. The good news is that you may still qualify for some alternative forms of financing. The bad news is that the interest rates are likely to be higher, so borrowing will be more expensive. You may also work on fixing your score by correcting your credit file or adding positive information to it.