Why Does Your Credit Score Matter?
Before applying for equipment financing, you will want to review your current credit score to help you understand your credit worthiness. The credit score can be confusing but represents an instrumental component to apply for credit and utilize your borrowing history, irrespective of your particular situation, how your business is structured and which lender you choose. Lenders use your credit score to determine risk levels, including how likely you will be to pay off your financing amount, the amount of financing you qualify for and its cost to you.
Personal Credit vs. Business Credit
Let’s look at personal credit scores first. Your credit score is determined by several factors. The company FICO, a shortened version of the company’s original name, Fair Isaac Co., provides the algorithm which predicts, or rates, how a borrower is likely to behave regarding the usage of personal credit. It is important to note that FICO is not a reporting agency; FICO simply gathers data collected by reporting agencies, inserts that data in its algorithm and produces the rating. There are three main reporting agencies that provide you with FICO credit scores - Experian, Equifax and TransUnion. All three reporting agencies vary in how they collect information and use it to produce their score, so you may wish to check each, as the scores may be slightly different among the three agencies. Personal credit scores range from 300-850, with 300 being very poor and 850 being exceptional. Several main factors determine a credit score and each one, to a varying degree, is weighted against the total score. They are (in order of highest to lowest weighting):
- Payment history – 35 percent
- Debt Outstanding – 30 percent
- Age of credit history – 15 percent
- Types or mix of credit accounts – 10 percent
- New credit inquires (the so-called Hard Inquiries) – 10 percent
There are different algorithm models used for different scenarios, so again depending upon the type of credit for which you are applying, the rating may vary. For instance, if you are looking to obtain financing for the purchase of a new truck, more weight may be given to past vehicle financing you successfully paid off to help the lender evaluate how likely you are to pay off the new credit request. Just a point or two can make a huge difference in outlaid finance charges so it is always prudent to monitor your credit score and check for and correct any inconsistences from the reporting agencies.
Business credit scores are determined differently, using such components as how long the business has been in operation, how much credit has been opened in the previous six months and the business’s level of credit utilization. Business credit scores are also rated differently, ranging from 0 – 100, with 0 being very poor and 100 being exceptional. The three main reporting agencies for business credit scores are Experian, Equifax and Dun & Bradstreet. Keep in mind, you will have to pay a fee to receive your business credit information, but having this information is vital to understanding your credit profile and keeping your credit information accurate and up-to-date.
PayNet, Inc. is another popular business credit report, which provides credit ratings on small businesses and maintains the largest proprietary database of small business loans, leases and lines of credit. Unlike other sources, PayNet’s database derived from historic term-debt is an indicator of a borrower’s payback through economic cycles. PayNet’s factors include, among others, payment and delinquency history and patterns, history of serious delinquency, years in business, borrower practices, paydown of borrowings and SIC/NAICS codes.
How To Improve Your Credit Score
On the personal side, most lenders generally look for credit scores higher than 600; on the business side, scores higher than 60 (or 600 for PayNet). To keep your credit scores high or to improve them, there are several steps that you can take:
- Know your credit scores so that you understand your personal and business credit profile.
- Pay all your bills on time.
- Don’t overutilize credit. Most lenders like to see credit utilization ratios of 30 percent or less.
- Don’t apply for too much credit in a short period of time, as hard inquiries from prospective lenders will negatively affect your credit score.
- Monitor your credit score and information gathered from the reporting agencies; correct any inaccuracy immediately.
Being able to access credit for business equipment needs is essential to keeping your business operating, competitive and profitable.
By always keeping an eye on your personal and business credit scores, and maintaining good credit practices, you will ensure you have access to the credit you need and will save money in the long run.
Nate Pfeifer, Credit Manager, has been with Amur Equipment Finance for 19 years. He is responsible for the credit department, underwriting transactions under $250,000, and is part of the Credit Committee. Nate has a total of 23 years of underwriting and commercial equipment finance experience. Nate is also a Certified Lease and Finance Professional (CLFP).