A healthy personal-credit history is a must for small-business loans

Elizabeth Karwowski, founder, Get Credit Healthy Inc.

As published in Scotsman Guide's Commercial Edition, April 2012.

Commercial mortgage brokers who  work with small-business owners are aware of how shopping for capital has become a greater challenge than ever. A borrower’s personal-credit score is a major factor that impacts a lender’s decision on providing a small-business loan — typically a loan of  $1 million or less.

In the U.S., lenders use the FICO score to determine the borrower’s creditworthiness and the interest rate they charge. By assessing variables within the credit history, a calculation is made and a number is applied to the account.

The average is 675 with a range that extends to 800. The higher the number, the lower the credit risk — this means better access to credit at a lower interest rate.

Being turned down for funding can be associated with a low personal-credit score — lower than 675 — rather than the health or the potential of the business.

Commercial mortgage brokers must ensure that their clients are aware of the factors that make up their credit scores. In general, the top concern of lenders is the repayment responsibility or the ability to make payments regularly and on time.

Bring the following factors to your client’s attention.

• Past-payment behavior is the largest single factor lenders consider, and it accounts for 35 percent of your credit score in the FICO model.
• The total of all your outstanding debt accounts for 30 percent of your score, and it is the second most important factor considered by lenders.
• The history of credit behavior and consistent repayment is worth 15 percent.
• The amount of new credit you carry makes up 10 percent of the FICO score.
• The credit mix accounts for the final 10 percent.

Small-business owners also must be aware that applying for credit lines only should be done when absolutely necessary. Lenders may consider multiple credit lines opened over a short period of time as a red flag for greater risk.

Having the right credit mix indicates that the borrower is able to manage debt and has less credit risk. Check that your client’s credit includes a variety of credit — revolving, installment and mortgages from various lenders — that is serviced on time, every time.

It is obvious that demand for small-business loans still exists in good volumes, but the nation’s largest conventional lenders have only contributed a small percentage toward meeting this demand. A commercial mortgage broker must remind small-business clients of the following:

• A clean bill of personal-credit health and a high credit score is the way to acquire small-business loans at reasonable interest rates.
• Small regional banks and local credit unions may be more receptive to the needs of small-business borrowers — if for no other reason than they are neighbors.
• Find resources for lending opportunities provided by nonprofit organizations such as SCORE (score.org).

With these tips in mind, commercial mortgage brokers can help their clients navigate the tough lending environment and inject capital into their ventures. 

Elizabeth Karwowski founded Get Credit Healthy Inc., a consumer-advocacy organization, to help individuals improve their credit health. She has FICO and Fair Credit Reporting Act certifications. Get Credit Healthy has been featured on NBC and Fox News and has helped hundreds of people restore their credit. In 2010, Karwowski began volunteering as a counselor with SCORE, a nonprofit resource partner with the U.S. Small Business Administration. Reach Karwowski at (877) 850-3444, ext. 1, or experts@getcredithealthy.com.