Did you know your credit score is an important part of starting a business? Keep reading to learn more about credit, how your credit score is calculated, as well as how it’s used when funding a new franchise.
Credit Score 101: What is Credit?
Credit is an agreement to borrow money from a lender — such as a bank or other financial institution — under the agreement to pay it back at a later date, typically with interest. Your credit score is a rating that lenders use to evaluate your creditworthiness, or how likely it is that you’ll pay back what you borrow. This score is built using information from three major credit bureaus: TransUnion, Equifax, and Experian.
Most credit score models range from 300-850. Generally, the higher your score, the better you look to potential lenders. A good credit score of 680 or higher gives you a better chance of getting approved for a loan. A higher credit score will also generally get you better loan terms, such as lower interest rates.
Why Does Your Credit Score Matter When Opening a Business?
Although your credit score is based on personal borrowing history, it can play an important role when starting a business. Your franchise won’t have any business credit history in the beginning. Most lenders will instead use your credit score to determine if you’re eligible for a business loan.
Your credit score is one of the biggest factors in determining whether you get approved for franchise financing. You’ll need a good credit score to get approved for the most desirable financing terms.
What Impacts Your Credit Score?
There are different types of credit scores. While each model uses slightly different equations to calculate your score, there are several common factors most models use.
Payment History: Your payment history is the biggest factor in your credit score. Lenders want to know you’ll pay them back on time. Even one missed payment could hurt your credit score.
Credit Utilization Rate: Revolving credit — such as credit cards — gives you access to a certain amount of credit, also known as your credit limit. Credit utilization rate refers to how much of your total credit you’re currently using. For example, if you have a credit card with a $1,000 limit and have a $100 balance, your credit utilization rate is 10%. You should try to keep your credit utilization rate under 30% for a better credit score.
Length of Credit History: If you’ve been borrowing and repaying money successfully for a long time, lenders know you’re probably going to pay them back. The length of your credit history contributes to your credit score.
Mix of Account Types: Having a mix of credit accounts can show you’re capable of managing multiple types of credit at once. For example, you can have an installment loan like a car loan as well as credit cards. As long as you stay up to date on your payments, this is typically viewed as a positive to potential lenders.
New Accounts: Opening multiple new credit accounts in a short amount of time can hurt your credit score. Lenders may consider you to be at higher risk for defaulting on a loan if you apply for too many accounts at once.
Your credit score is just one factor in securing the right level of funding for your start up. If you are ready to explore funding options for your new business, contact FranFund today to help kickstart your enterprise.
FranFund designs flexible funding plans that help new and experienced business owners fund their franchises. We have a powerful and accurate pre-approval process with a 99% success rate in obtaining loans for borrowers who received FranFund pre-approval! Beyond this, we offer ongoing support and ensure our clients know all of their options for funding single units through multi-unit expansions, including SBA loans, conventional lending, and retirement plan funding.
Along with the right planning and the faith you have in yourself, use these signs as the motivation you need to take the next step.