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Beating the Borrowing Blues

Looking for a business loan? Today credit history plays a greater role in whether you’ll get a thumbs-up from lenders. Peter Rassel, FastTrac facilitator at Georgia State University’s Small Business Development Center, explains:

Before the run of consolidations in the financial-services industry, bankers had more personal relationships with business owners. Your local banker might have known you and your family, belonged to same business associations or even gone to the same church. Bottom line, your banker knew if you honored debts.

Today, those social ties have weakened, which means credit reports now have become a proxy for character — and a greater factor in your ability to win financing.

Most people, even those with business experience, simply don’t know what their credit report says about them. Big mistake. If you know what your report contains, you’re better prepared to explain legitimate concerns — or outright mistakes — that bankers will zero in on. For example, perhaps there was a prolonged illness, divorce or layoff that caused you to miss payments.

Information remains on your report for 7-10 years. One or two late payments won’t seriously affect a credit rating, but a greater pattern of negligence will raise eyebrows and lower the chances of getting a loan. A credit report reveals your willingness and reliability to pay debts, with lower numbers demonstrating higher performance. For example:

  • A "1" is the best mark, showing that bills are paid on time.
  • "2" indicates an overdue payment(s) of more than 30 days but less than 60.
  • "7" shows garnished wages.
  • "8" means repossessed property.

To get copies of your credit report, go online or call a consumer-reporting bureau. There are three major ones: TransUnion, Equifax and Experian (formerly TRW). Information may vary because these bureaus don’t share information.

You also want to know your credit score, which identifies your level of future financial risk. This score is determined by a mathematical equation based on information in your credit report. Scores range from 300 to 850, and the higher the score, the lower risk you pose to lenders — and the lower interest rate you’ll be able to secure. (Credit scores are often referred to as "FICO scores" because most scores are produced with software from Fair Isaac and Co.

Prompt payment over time is the best way to bolster your credit report. Yet there may be items you need to appeal, such as errors. With identify theft on the upswing, a report may show accounts that were never actually opened. Or a vendor may have given a wrong Social Security number, causing someone else’s information to wind up on your credit report. Or perhaps you went car shopping, causing several dealers to request your credit report. Even if you decided not to buy a car, multiple "inquiries" may make it appear that you were turned down for credit.

Borrowing Is Selling

Applying for a business loan is a sales job. And, as in most selling situations, you’ll typically hear more negative than positives. Yet banks have different criteria for how they view credit reports. Just because one lender regards your application negatively, doesn’t mean all lenders will turn you down.

Before applying for any loan, know precisely how much you need to borrow. Most entrepreneurs underestimate their financial needs. Also know what kind of terms you’re looking for — the length of loan and type of interest rate. View these terms, along with equity and collateral, as negotiable points. If lenders want your business, they’ll concede on some areas.

Tip: A business plan can be a big asset in securing a loan — as long as it communicates clearly and accurately. That’s one reason FastTrac encourages entrepreneurs to "own" their plans rather than hand them off to a consultant or accountant to prepare. An outsider may interpret your vision differently, which is dangerous. This is your story. You need to understand how your business operates and be able to answer questions about the numbers yourself.

Clarity is also crucial. A loan officer is your advocate, but you can’t expect him or her to remember the details of your business plan during a review meeting of the loan committee. Your plan needs to be self-explanatory; it should answer questions — not raise them.

Although you don’t want someone else to write your plan, it is a good idea to have an outsider review it and check for internal consistency. After several revisions, it’s easy to have your financial projections state one thing while the executive summary says something different. Double-check your facts. If the loan committee spots inconsistencies, your credibility sinks fast.

Writer: T.J. Becker