Your credit score can mean the difference between being denied or approved for credit, and a low or high interest rate. A good score can help you qualify for an apartment rental and even help you get utilities connected without a deposit.
What is it?
Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It’s designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.
There are a multitude of credit-scoring models in existence, but there’s one that dominates the market: the FICO credit score. According to myFICO.com, the consumer website for the FICO score developer, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”
FICO scores range from 300 to 850, where a higher number indicates lower risk. What’s a good score?
A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. Unfortunately, consumers currently have access to only their Equifax and TransUnion FICO scores. Experian ended its agreement with myFICO.com in 2009.
What goes into a credit score?
Data from your credit report goes into five major categories that make up a FICO score. The scoring model weighs some factors more heavily, such as payment history and debt owed.
Elements of your credit score
Source: myFICO.com
Payment history: (35 percent) — Your account payment information, including any delinquencies and public records.
Amounts owed: (30 percent) — How much you owe on your accounts. The amount of available credit you’re using on revolving accounts is heavily weighted.
Length of credit history: (15 percent) — How long ago you opened accounts and time since account activity.
Types of credit used: (10 percent) — The mix of accounts you have, such as revolving and installment.
New credit: (10 percent) — Your pursuit of new credit, including credit inquiries and number of recently opened accounts.
Personal or demographic information such as age, race, address, marital status, income and employment don’t affect the score.
Different score impact for same missteps
How much does a specific change affect a credit score? The answer is usually “it depends,” and for good reason. Credit score developers don’t reveal the exact point deductions. The weight of any given activity can also vary for different credit histories.
Within a scoring model, there’s more than one formula used to calculate a score, and each formula is designed for a category of consumers with similar credit profiles. The information in your credit report determines which formula is used. If you are new to credit, for instance, the scoring model will put you into a category for people with young credit histories, and use a scoring formula specific to that group. Such groups are called scorecards. Within that group, recent inquiries may cost more points than they would for a different group.
How to check your credit score
Federal law mandates the consumer’s right to a free credit report annually from each credit reporting agency, but not to a free credit score. Use our FICO score estimator to get your score range free of charge. To get your exact number, you have to purchase it from a score provider, such as myFICO.com or one of the reporting agencies.
Citation: “What Is a Credit Score?” Bankrate. Bankrate.com, n.d. Web.
Small business financing can be difficult to obtain, and at some point it may even seem like you’ve run out of options, but there are many different ways to get funding, a lot of which you may not even know. If you think you’ve exhausted all your options, comb over this list and dive deeper into the areas you haven’t tried, (or reexamine the ones you have but were unsuccessful at). Access to Capital offers not only funding education, but tips on how you can stop getting turned down for loans, so make sure you research every option before calling it quits.
Crowdfunding
Made popular by sites like Kickstarter and Indiegogo, crowdfunding is the process of requesting funds or small investments from relatives, friends, or strangers to help fund your business. Learn all about crowdfunding, whether it’s right for your business, and how to get started, in our crowdfunding guide.
Using the Opportunity Finance Network’s CDFI Locator
Peer-to-Peer lending (P2P)
P2P lending allows a business owner to borrow and lend money with their peers in the business space. P2P lending is a method of debt financing that enables individuals to borrow and lend money – without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios.
Business Credit Cards
Business credit cards can aid in keeping businesses expenses on track and help in obtaining the purchasing power needed to run a business. Often times business credit cards will provide rewards for business purchases such as airline miles or cash back.
Venture capital is money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt.
Angel Investors:
An Angel investor is anyone who invests their money in an entrepreneurial company. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times. Angel Investors are focused on helping the business succeed, rather than reaping a huge profit from their investment. -Sources Entrepreneur.com and Investopedia.com
Business Incubation:
Business incubation programs are designed to support the successful development of entrepreneurial companies through a variety of business support resources and services. Check outEntrepreneur.com’s overview of incubation programs for the quick facts, or find a program near you: The International Business Innovation Association (INBIA) is “the world’s leading organization advancing business incubation and entrepreneurship.” Their site may be able to help you find an incubator that’s right for your startup.
Business Plan Competitions:
Business plan competitions are an alternative source of financing that can be relatively low risk. They typically do not require you to show your credit score or put up collateral.
Trying to find a competition near you or read more details? Luckily there’s a site dedicated to tracking these competitions and making them easily searchable!
The SBA
SBA 7(a) loans:
The SBA guarantees loans to help small businesses unable to get traditional loans through banks.
The 7(a) Loan Program is the SBA’s primary program for helping startups and existing small businesses, with financing guaranteed for a variety of general business purposes. SBA does not make loans itself, but rather guarantees loans made by participating lending institutions. Visit our SBA Loans resource page to learn more.
The Small Business Lending Fund is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. Through the Small Business Lending Fund, Main Street banks and small businesses can work together to help create jobs and promote economic growth in local communities across the nation. -Source Treasury.gov
Equity Crowdfunding is a hybrid form of funding that combines equity financing with crowdfunding. It’s a relatively new form of funding that was just opened to the public in May of 2016. Now, instead of just accredited investors being able to provide funds, anyone can fund a business in exchange for equity in the company. Learn more about equity crowdfunding.
Personal Assets
Mortgages:
Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front, and the borrower is obliged to pay back with a predetermined set of payments. -Source Investopedia.com
401(k) Financing:
If you have built up a 401(k), you can consider using your retirement account from previous jobs to fund your new business.
Bootstrapping/Personal Savings:
Stretching all of your resources as far as they can go can be an effective way to increase cash flow.
A personal credit card issued by a financial company that gives you the option to borrow funds, usually at point of sale, could help fund minor purchases for your business. Because of the interest rates on credit cards, they are primarily used for short-term financing.
Citation: “Ways to Fund Your Small Business.” Access To Capital. Accesstocapital.com, n.d. Web.
Right now, aspiring entrepreneurs all across the country are planning their paths to business ownership. It’s a journey that requires a lot of hard work, and many people end up failing. But if your company survives, the rewards of entrepreneurship are well worth the obstacles you’ll face on the road to success.
If you think you’re ready to start your first business, here’s a step-by-step overview of what you need to do to make it happen.
Every new business starts with an idea. Maybe there’s something you’re really knowledgeable and passionate about, or perhaps you think you’ve found a way to fill a gap in the marketplace. Wherever your interests lie, it’s almost guaranteed that there’s a way to turn it into a business.
Once you’ve narrowed your list of ideas down to one or two, do a quick search for existing companies in your chosen industry. Learn what the current brand leaders are doing, and figure out how you can do it better. If you think your business can deliver something other companies don’t (or deliver the same thing, but faster and cheaper), you’ve got a solid idea and are ready to create a business plan.
Another option is to open a franchise of an established company. The concept, brand following and business model are already in place; all you need is a good location and the means to fund your operation.
David Silverstein, a global business consultant and CEO of operational strategy consulting firm BMGI, cautioned would-be entrepreneurs against starting a business just for the sake of being a business owner: You need a viable business model, not just an idea, he said.
Build a business plan
Now that you have your idea in place, you need to ask yourself a few important questions: What is the purpose of your business? Who are you selling to? What are your end goals? How will you finance your startup costs? All of these questions can be answered in a well-written business plan.
A business plan helps you figure out where your company is going, how it will overcome any potential difficulties and what you need to sustain it. A full guide to writing your plan can be found here.
Assess your finances
Starting any business has a price, so you need to determine how you’re going to cover those costs. Do you have the means to fund your startup, or will you need to borrow money? If you are planning to make your new business your full-time job, it’s wise to wait until you have at least some money put away for startup costs and for sustaining yourself in the beginning before you start making a profit.
While many entrepreneurs put their own money into their new companies, it’s very possible that you’ll need financial assistance. A commercial loan through a bank is a good starting point, although these are often difficult to secure. If you are unable to take out a bank loan, you can apply for a small business loan through the Small Business Administration (SBA) or an alternative lender. [See Related Story: Best Alternative Small Business Loans]
Startups requiring a lot more funding up front may want to consider an investor. Investors usually provide several million dollars or more to a fledgling company, with the expectation that the backers will have a hands-on role in running your business. Alternatively, you could launch an equity crowdfunding campaign to raise smaller amounts of money from multiple backers.
You can learn more about each of these capital sources and more in our guide to startup finance options.
Editor’s Note: Looking for information on business loans? Fill in the questionnaire below, and you will be contacted by lenders ready to discuss your loan needs.
Citation: “How to Start a Business: A Step-by-Step Guide” Business News Daily. Businessnewsdaily.com, n.d. Web.
