Ravi Chandran
If you have a good credit rating, you will have a pretty easy time getting credit offers from a wide variety of funding sources to expand your business
If you have a good credit rating, you will have a pretty easy time getting credit offers from a wide variety of funding sources to expand your business. If your score is low or nonexistent, however, you won’t.
But a low score isn’t something you can run away from, and even if you avoid it, it won’t go away. The trick is to fund your business in ways that actually get your score back on track so when you’re ready to move your business to the next stage, your score will start opening doors rather than getting them slammed in your face.
Here are some ideas for entrepreneurs who want to achieve good credit rating:
1. Look beyond credit cards and bank loans for financing. Studies show that credit card and bank financing account for just 25 percent of the total funding needs of early-stage entrepreneurs. This statistic should provide you some comfort, because it implies that 75 per cent of the money you need can come from other sources that rely less good credit score.
While there are credit cards and lending programs designed for individuals with poor credit, these options will typically charge a higher interest rate to compensate for the credit risk posed by a sub-prime borrower. One bank option for those with poor credit scores is a home equity line of credit, though you should be wary of putting your home on the line to finance a risky early-stage venture.
2. Seek personal loans from your relatives and friends. Everyone likes the idea of entrepreneurship, which may be why, at some point, more than 50 per cent of all business owners get financing help from friends and relatives. Chances are, your relatives and friends want to see you succeed and may be able to help make your business dream a reality.
They also may not dwell on your poor credit score because they trust you, or they believe your business concept to be sound. (Banks used to evaluate your character and business conditions the way family and friends still do, but credit scoring models have made lending decisions more automated, resulting in the critical power your credit score holds over you.)
Also, you can now use private personal loans from relatives, friends and business associates to rebuild your good credit rating.
3. Don’t overlook gifts and grants. If you need to avoid making debt payments, focus on getting “free” money in the form of gifts and grants. Your search will be long and hard–despite what you read on the internet, there is no silver bullet here. Be wary of services that promise to locate government or private grant programs for you. If you want to avoid scams, you will need to do your homework to locate programs that are available for your type of business.
Health-care businesses, technology companies, and retail businesses in low-income areas tend to qualify for the bulk of grant money. Other forms of “free” money include gifts from relatives, free office space from former employers, and free services from friends or business associates. If you’re creative, you can reduce your startup costs by brainstorming a list of people who would be willing to provide you with gifts and subsidised personal loans.
Your credit report is a record of your credit payment history compiled from different credit providers. As most lenders will check your credit file to assess your credit worthiness prior to making a decision, a good credit repayment history will make it easier for you to obtain credit and to qualify for loans.
By reviewing your credit report regularly, it allows you to be aware of any information that is uploaded on your credit file. The other advantage of monitoring your credit file is that it protects against possible fraudulent use of your personal details to obtain credit.
But what is a good credit rating (or score)?
A credit score is a number used by lenders as an indicator of how an individual is likely to repay his debts and the probability of going into default. CBS credit score is based on the many types of information in the credit report to calculate a number that estimates your level of future credit risk.
The score ranges from 1000 to 2000, where individuals scoring 1000 have the highest likelihood of defaulting on a repayment, whereas those scoring 2000 have the lowest chance of reaching a delinquency status.
Factors Affecting Your Credit Score
• Utilization Pattern – This refers to the amount of credit owed/ used per account.
• Recent Credit – Number of newly opened credit accounts. It is advisable to apply for new credit in moderation.
• Account Delinquency Data – Presence of delinquency (late payment) on your loan accounts will reduce your credit score.
• Credit Account History – Accounts with a history of prompt payments will help to boost your credit rating.
• Available Credit – This refers to the number of accounts available (open or active) for credit.
• Enquiry Activity – Each time a potential lender pulls your credit report in response to a new credit application, an enquiry is placed on your file. Having too many enquiries in your credit report indicate to lenders that you are trying to take on more debt, therefore increasing your credit exposure.
