Understanding Your Credit Score and Small Business Funding

Your Credit Score and Small Business

You might have heard the term before “credit score”, or perhaps it’s a brand new one for you?

Depending on your age, life or financial situation and a number of other factors, it’s quite likely that you’ve never had to worry about your credit score or credit rating. On the other hand, as an average Canadian it’s even more likely that you are or were extremely worried of your credit score on more occasions then you’d like to mention.

Your credit score is a number that is sort of hidden in the background for every Canadian. It’s a number that determines your financial responsibility or trustworthiness so to say.

As a young adult, your credit plays a major part of your obtaining a credit card, your first bank loan, line of credit, purchasing the first vehicle or first home. Anytime your financial status or character is called upon, your credit score or credit reputation is what determines your eligibility to move to the next step and for the other involved party to provide you the opportunity to obtain that credit card, loan, mortgage or something of value.

Most of the time; you simply visit your bank and apply for a credit card with those amazing cash back dollars and you go home. A few weeks later, credit card with a limited balance comes to your door and you simply have to call to activate it and it’s ready to use.

Or you find a car that you’d like to own, put some money down and you have to get car loan to pay of the rest. It only costs you $180 per month, instead of paying the full amount at once which is always easier. You enter the office, fill out an application, state where you work and maybe provide some pay stubs, and you’re done.

Sounds simple doesn’t it?

If this is your situation, you’re more likely to be on the end of “the type of person” who doesn’t ever really worry about their credit score or credit rating. Maybe you’re aware of it, maybe you don’t care, but usually it means you have a  job, maybe a determined career, you pay your bills on time, don’t carry large balances, don’t have huge debt and you’re financially organized.

The reality for most Canadians is a bit different. Most Canadians live pay check to pay check, which means that borrowing is one way to get from point A to point B. It’s normal.

Everybody borrows. Be it from family or from banks – or if you use your credit card, you are borrowing money, borrowing money that has to be paid back.

Looking at the average Canadian, 1 in 3 has had difficulty obtaining a credit card, a loan, line of credit, car loan and not to mention a mortgage.

Why?

Well, one of the major factors starting off is how much money you make?

The banks and lenders first look at your income to determine how much they can give you.

If your income is below average, the amount you may be able to obtain from a lender may be below average. If your income however is greater than the average, your chances of obtaining more money is much greater.

It makes a lot of sense actually.

Just put yourself in a situation as a bank or a lender.

If a stranger comes to you and asks for $5,000 and says I will pay you back in 3 weeks. However when you look into it, this person has a part time job that works 10 hours per week at minimum wage. They simply don’t make enough to be able to pay you back in 3 weeks; not at that rate always.

Now let’s say another stranger comes to you and asks for $5,000 and say’s I will pay you back in 3 weeks and show you their income is $7,000 per month and also says here is my brand name watch as collateral and a letter to show that my partner will pay you if I can’t.

Who would you feel more conformable giving the money to?

You probably shouldn’t be giving money to strangers no matter what, but as an example, you have to be a good judge of character to a degree but at the same time you have to look at your chances of getting that money back.

The banks and lenders do the exact same. But so they don’t have to judge your character or worry too much, they simply have a rating system. More of an automatic trust system, which is the credit score.

Your income, while it’s the number one factor used to determine how much a bank or lender can provide you when needed, it’s not always the only factor.

In fact, a lot of “high earning” individuals often have real bad credit. Read on further to learn why.

Factors such as your income, your collateral, your lifestyle, frequency of pay back and more are what build your credit score, your financial reputation and keep you balanced.

Most people, at nowadays are tired of working for somebody else. They want to be their own boss, start their own business – live the entrepreneurial life style.

While starting a small business in the great Canadian economy, it’s a lot of work, it cost a lot of money and having a good credit score to get financing is critical to the success of the business.

This guide is entirely dedicated to helping you as a Canadian figure out the ins and outs of credit scores, starting a business, getting funding and more.

Most of the time, credit score guides are long, boring and don’t really tell you much. If you’re reading this guide you most likely want to learn about your credit score, want to start a small business and figure out what to do next.

Most “credit score guides” out there just tell you a bunch of tips how to improve your credit score, how do pay off your debt and where to keep track of your credit score.

But wait, who cares about that?

If you’ve read any of those guides they tell you to save a little bit on the side, write down how much debt you have, pay it off little by little and don’t over spend on things you don’t need.

Great! Thanks for the help telling me what I need to do – this is the general sarcastic feedback most people have when they read these guides.

Our guide is a bit different as you can probably already tell by this introduction.

This guide is written by a number of small business experts, funding/financing advisors and from a collection of questions asked by thousands of Canadians over the last few years.

What we will do in this guide is tell you about your credit score, what it really is, how it’s really calculated, why it’s important, about starting a business, about your credit score and your business, applying for funding (banks and government), how to improve your score and much more.

And as you can tell, it’s going to be simplified, easy to read, easy to understand – no technical language needed here. You don’t have to stop and think – just read, understand and be done with it.

Your credit score, when starting a small business or wanting to start a business is not something you need to spend ages on. Learn how it works, learn your own score, figure out how to improve it and move on. Get to business so to say. Your business needs your attention to let’s do the quick in and out of your credit score and business.

Read on to get started.

What is Credit Score?

Your credit score is an important aspect of your financial profile.

But what exactly does that mean?

A credit score is simply a number or a range of numbers that matter, financially speaking to not just you but to those around you when you are applying for a credit card, a bank loan, car loan, mortgage, even a job.

This range of numbers, are actually your credit score.

In Canada, your credit score ranges from 300 to 900. The larger the number, the better your credit score is. An excellent credit score is considered to be between 800 and 900.

To simplify it even further for you; when applying for any type of money or anything having to do with finances, your credit score may be looked at.

A credit score of 300 to 599 means that your credit rating is poor.

Poor credit ratings are frowned upon. Your credit is simply not good and it means that you have a long way ahead of you to improve tour score. A poor credit rating often means that you are not financially responsible and with this type of score, you may have a very difficult time obtaining even the simplest credit cards.

A credit score of 600 to 649 means that your credit rating is fair.

Having a fair credit rating, you are considered in between. You may have a difficult time obtaining financing of any sort, but if provided financing you will have to show more to the lender then an average person with good credit. This means, pay stubs, collateral, higher down payments, co-signers or maybe be offered with larger interest rates.

A credit score of 650 to 719 means that your credit rating is good.

Good credit scores are good. Having a good credit score simply means you’re good to go. You will get financing as long as you are able to provide income verifications..etc A good credit score will not get you the best rates, best repayment terms but it is a healthy score.

A credit score of 720 to 799 means that your credit rating is very good.

When you have very good credit score, this is when all of the creditors, banks, lenders phone you regularly to say “hey here is more money”, a situation where they are chasing you to offer you more since they trust you and know you’re a healthy customer.

A credit score of 800 to 900 means that your credit rating is excellent.

No better candidate for credit or financing then one with a credit score of between 800 and 900. An excellent score gets you what you need. However do keep in mind that sometimes you may have a perfect credit score but may be over borrowing and lenders may not want to give you much more.

Simply having the best credit score doesn’t always mean guaranteed funding so be sure you understand your credit score, your borrowing history and how much you can afford to pay back

How is your credit score calculated?

Realistically there are no secret to figuring out the algorithm the credit bureau uses when calculating peoples credit scores. Companies such as Equifax or TransUnion have their own reporting system, however generally speaking a credit score is simply calculated in a very simple way.

The history of your borrowing, which can mean any money borrowed from bank mortgages, bank loans, lines of credit, credit cards or even those companies which report to the credit agencies for paying your bills such as your cell phone providers or your hydro providers..etc, add or take away from your credit score.

Your borrowing history is important as well as your pay back of the borrowed funds.

–          How much do you make (indirectly)

–          How much do you have borrowed

–          Type of borrowing

–          Your payment schedule

–          Balance being carried (out of the total borrowed)

–          Number of delinquent accounts or missed payments

–          Accounts in collection

–          Number of soft credit checks

–          Number of hard credit checks

–          Approved and denied financing

These are some of the factors which can add to your credit score moving up or moving down.

How much money you make

Indirectly, the amount of income you receive does impact your credit score. It’s indirect as the credit reporting companies don’t display this or really need to know this, but the amount of money you make impact your ability to borrow.

Simply put, if you don’t make any money, nobody will give you any credit as they are not sure how you will pay it back. Think about it, would you give somebody money with no guarantee of getting it back?

An unspoken rule is to sort of apply the same logic as the debt to ratio logic to income to credit.

For example if you make $10,000 per month in income; you are okay if $3,000 of that (30% of your income) goes towards paying your debt, but anything over that starts to be risky and could potentially impact your credit rating – but not always, as it’s one of the factors only.

How much is borrowed

Having too much money borrowed against your income could impact your credit score. The same applies to the money you already have borrowed – where we go into the debt to credit ration

Your debt to credit ratio is the ideal debt to credit ratio seems to be in the 1 to 10 percent range, but more realistically having a 30 percent debt to credit ration is considered acceptable to maintaining your good credit rating.

So what this means is that the perfect credit score would be those who utilize only 1 to 10 or up to 30% max of the potential credit.

As an example, if you have a credit card with a $10,000 limit, don’t max it out as this means you’re hitting the 100% debt to credit ration, and a big no no. Your perfect debt to credit ratio would be to borrow $100 – $1,000 out of that $10,000 credit card limit, but you can go up as high as $3,000 and still remain okay.

Keep in mind that this not only based on one credit card or one loan or mortgage, but the credit reporting agencies look at all the borrowed money to calculate the credit score.

Type of borrowing

The type of borrowing that is looked at on a credit report doesn’t always mean that you’re really borrowing money.  Certain companies such as let’s say Rogers Wireless, a cell phone service provider reports to the credit bureau as they technically provide you a service before you pay, which is almost like lending money (which has to be paid back upon bill time), and if payment is missed, you missed your credit payment.

It doesn’t really matter what kind of borrowing you do, if the borrowed money is a bank loan or a private loan, or a credit card or line of credit, a mortgage or just a bill, as long as they report to the credit bureau, the credit scoring applies.

Some borrowing is done in the form of an open loan (when you can pay at any time), some are closed loan plans, some are rolling credit, and all of these options are considered in your credit score.

Your payment schedule

Your payment schedule be it weekly, bi-weekly, monthly, quarterly or even hourly doesn’t really matter in terms of borrowing and your credit score.

What does impact your credit score is not being able to make the necessary payments which put your accounts and credits into a delinquency mode and often can result in a collections call if payments are missed to often and are not paid.

This can have a major impact on your credit score.

Credit Checks

If you’re just playing around and want to see if you can get that credit card, if you can get a car loan to buy that fancy car that you see online, keep in mind that these are considered credit checks.

There are soft credit checks and hard credit checks.

The soft ones are your existing credit provider checking in regularly to see if they can give you more, or pre-approvals..etc, while having a lot of them done can impact your credit score, it’s just a small factor.

Where as the hard credit checks are actual form fills where the bank or credit provider runs your application to check your ability to borrow and payback.

Having too many hard credit checks could impact your credit score negatively, especially if you’re being denied financing.

Most people when looking for financing will apply to a form of credit one per year on average, some more some less – anything more than once per quarter is seen as unusual and could impact your credit score.

Who should know their credit score and why should you care?

Having a good credit score gives one the ability to borrow money in order to pay or purchase things on “credit” and make payments over a period of time versus using your own personal cash in a lump sum.

Anybody who is looking at borrowing money for any purpose should know their credit score, or at least be aware of their income to debt to credit ratios.

Why should you care?

Well knowing and understanding your credit score will give you an idea of how much money you can borrow and how much you can pay back.

Bad Credit vs Good Credit

Having a bad credit score can impact your financial life.

Borrowing money from creditors, your credit score is important. Having a low credit score, or a bad credit score can change how the creditors see you and ultimately their decision to fund you or now.

Bad credit can cause you not to be able to obtain a credit card, a line of credit or even a mortgage.

But having bad credit is not always the end of the world, financially speaking.

You may still work slowly toward improving your credit, or you will work with private lenders who do offer you financing, just in an alternative way.

With bad credit you may still be able to borrow money however certain things may be a bit different such as the payment cycle, amount you can borrow, the interest rate and pay back schedule.

Having good credit on the other hand, you have it all handed to you.

Most of the time those individuals who worry about their credit are those who are on the down ward spiral with their credit score.

Think about it, the reason you’re reading this guide right now is not because you have good or excellent credit, right?

With good credit, you’re able to apply to any financing program, banks, lines of credit or credit cards with little to no concern of being approved. As long as you’re able to make your payments, keep your debt to credit ration on the low end, your credit score will remain a good one.

Starting a Small Business

If you’ve decide you want to start a small business, your credit score will be a factor if you’re thinking of applying for any financing.

A small business in Canada is tough work. Starting a business takes a lot of time, a lot of work, a good business idea and of course, money – and lot’s of it.

Money makes starting a small business a lot easier.

Unless you have money saved up to start your small business, you will have to consider financing and this is where your credit score and ability to borrow money plays a role.

Should you start a small business

Deciding on starting a small business is a tough decision to make.

You have bills, responsibilities and you will need the time and the money to make it happen. This is especially a difficult decision if you’re already working a comfortable job.

While starting a small business isn’t for everyone, if done right it can turn very lucrative and ease your concerns.

But to get there; you have to make the decision and figure out if starting a small business is right for you, and of course if you have the funds you need to make it happen.

Needing funding for your small business

Starting a small business in Canada, chances are that you need funding of some sort to help out.

Be it money from personal savings, borrowing from family or friends, bank loans, credit cards or the various government funding options, you first need to ensure you have a few things taken care of:

1. Know your credit score before you start to borrow
2. Have a business plan made
3. Showcase your funding needs (from your business plan)
4. Know where to apply for financing or funding (lots of factors)

As mentioned before, your credit score does impact your chances of obtaining financing so before you spend your time planning your small business, be sure to know what your credit score really is.

While not all places will worry about your credit score, many will use it as a deciding factor if to give you money for your business or not, or how much to charge you for the money lent..etc

Your credit score is very important when starting a small business – it tells the lender how much money they can give you, how much you can pay back and ultimately this play a major role on your business, especially if you need the funds to pay yourself, hire staff, to pay for tools/equipment..etc with the borrowed money.

There may be lenders out there that won’t care much of your credit score, but do keep in mind that these are private lenders and not the A lenders (like the banks or the government), so you have to be extra careful with your funding request – make sure you know how much they charge before you sign on.

Government funding and credit score

As a Canadian small business owner or startup entrepreneur, you may be eligible to get funding from various government funding programs.

These government funding programs will still review your credit score, but many will focus on your location, industry and business funding needs as well as your business plan to conclude potential eligibility.

Funding from the government for your small business could be obtained for various needs such as:

• Hiring and training staff
• To purchase tools, supplies and equipment
• Pay for marketing and advertising
• To make leasehold improvements
• Improving cash flow
• and more

Consider government funding programs as a source to obtain funding for your small business where your credit score could have less of a impact then if applying directly do a bank.