Millions of people in the United States struggle financially and cannot receive a line of credit or qualify for a loan all because of bad credit or lack of credit. Sadly, these and other credit woes hold people back and keep them from prospering, not to mention stifling any dream of owning a successful business or expanding an existing one.
I’m Lori Obiedzinski, director of client and partner relations at Rosy Salon Software, and I’m thrilled to welcome Adriana Williams, Partnerships Manager with Accion Opportunity Fund. Today, we’re here to discuss how you can become financially resilient and build or rebuild your credit history.
Lori: First of all, please help us define credit and how it applies to individuals and businesses.
Adriana: Credit is a metric used by lenders to determine the creditworthiness of any individual and/or business.
Lori: Why is credit important to small businesses, like salons, and how would they use it?
Adriana: Credit is extremely for businesses in order to have cash flow, make payroll, make tenant improvements or purchase inventory. There is a myriad of reasons why a small business needs credit.
Lori: What are some examples of types of investments leveraged by credit/loans?
Adriana: Many entrepreneurs would invest in purchasing their business location, for instance, or equipment purchases that would be leveraged by a loan.
Lori: Why use loans (with good credit) vs. cash?
Adriana: Loans are a good way for businesses to help build their business credit. Many businesses also prefer to use a loan instead of using cash to not affect cash flow. Also, the interest expense on business loans can be written off on the business taxes.
Lori: A large percentage of salon and spa owners are sole proprietors. How does credit affect them differently, and what are some of the best practices to ensure securing a loan for their business?
Adriana: Many sole proprietors run their businesses primarily using their personal credit, which results in your personal credit impacting your business far more than the other way around. If possible, try to avoid providing your Social Security Number (and hence, access to your personal credit) for business purposes. This will help keep the two separate. For instance, open a business credit card instead of a personal one. Credit bureaus do not distinguish between business and personal inquiries, and too many can have a negative impact on your credit score.
Lori: What are some of the basics that people should know about their credit?
Adriana: Credit scores are determined by five factors: payment history (35%), credit history (15%), new credit (10%), types of credit (10%), and amount owed (30%). Your credit report will show your credit summary (a listing of all the accounts ever connected to you), public record information (i.g.: judgments, liens, bankruptcies, etc.), and credit inquiries.
Lori: What’s the difference between credit score and FICO score? Which one is more important?
Adriana: FICO stands for Fair Isaac Corporation, the company that created the FICO credit scoring models that a majority (some reports say over 90%) of lenders use. So, you can think of FICO as a specific brand of credit score. There will be other companies that create their own credit score. However, the two main companies are FICO and VantageScore.
Lori: What is considered a good or bad credit score? How do examples of bad scores and good scores translate into interest rates and the ability to get a loan or credit card with a good rate?
Adriana: A FICO score of 579 and below is considered to be poor. Those between 670-739 are considered to be good. Lenders use credit scores to help predict a consumer’s ability to repay a debt on time. Therefore, those who have poor credit tend to pay a higher interest rate because they are deemed to be riskier.
Lori: How can someone find out about their credit score? How about for their business?
Adriana: Every consumer has the right to get a free copy of their credit report each year. Please visit www.annualcreditreport.com
For business credit, apply for a DUNS number with Dun & Bradstreet. Open a business credit file with Experian and Equifax.
Lori: Why is knowing your business credit score so important?
Adriana: Small business owners who understand their business credit scores are 41% more likely to be approved when they apply for a business loan.
Those who understand their business credit profile are also 31% more likely to consider expanding their business.
Yet, 45% of small business owners don’t know they have a business credit score and 82% don’t know how to interpret their score.
Lori: What can people do about having bad credit?
Adriana: Tips to improve your credit would include paying your bills on time, decreasing credit balances (how much you owe), don’t max out your credit cards, and only applying for new credit when you really need it.
Lori: How long does something like that take to have a positive effect?
Adriana: It depends on what is dragging down the individual’s credit. Improving your creditworthiness does not happen overnight. Having said that, if you have huge credit card balances, paying down all or a large portion of it is probably the quickest way one can improve their credit.
Lori: What about those who have no credit?
Adriana: Those who have no credit can build credit by applying for a credit card, for instance, using it sensibly and paying the bills (in full, ideally) on time.
Lori: What red flags should a person look for when establishing or rebuilding their credit?
Adriana: Be sure not to max out on your credit card, pay your balance(s) in full (if possible) or pay down as much as you can each month. If you’re trying to establish credit, be sure not to apply for too many cards and make the payments on time.
Lori: What tips can you offer salon or spa owners who are struggling financially right now?
Adriana: Have you tried using social media or any other marketing tools to boost your business’ profile? In order to boost client retention, perhaps try a customer loyalty program? Are there any costs which you can lower? There are also many grant opportunities that can perhaps help in the short term until your business gets back on its feet.
Lori: If a salon is looking to secure a loan, how do you suggest they proceed?
Adriana: First, explore your financing options. Educate yourself about types of loans, lending terms, processes, and interest rates, plus watch reviews for red flags with lenders or their business practices.
Before applying for a loan, you should first examine your business’ cash flow to make sure you can afford the loan. Next, get your documentation in order: you’ll need your most recent tax returns, business bank statements, and any other documentation the lender may require.
A detailed business plan is also essential to the process. A well-written plan shows lenders that you’ve done your homework, you have a plan for your long-term success, and that your business makes financial sense. Your business plan will help a lender see how you intend to use the funds and how they’ll make their money back.
Once you find a lender, have your paperwork in order and start the application process. Follow your lender’s instructions to submit your application with all of the needed documentation, then wait for the approval process to take its course until you hear back on the status of your loan.
Lori: Tell us about Accion Opportunity Fund Community Development.
Adriana: Accion Opportunity Fund Community Development (AOF) is a non-profit small business lender poised to help entrepreneurs who don’t meet the requirements for traditional financing. Instead, they support businesses to help uplift communities and anchor local economies.
If you’re looking for a small business loan, AOF can connect you with the financing you need. We look at more than just your credit score to determine business viability and structure loans that work for your business, not someone else’s.
Lori: Adriana, thank you for being here with us today and helping us understand building or rebuilding credit. It’s been a pleasure chatting with you.
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