As incredible as an idea may be for a new business, lenders won’t base a business loan on a start-up’s potential. Entrepreneurs need to rely on personal credit scores to secure financing early in their venture’s history.
JVS Chicago lends to people who can’t qualify for bank loans, for example, through its Duman Entrepreneurship Center, but there are still credit requirements. The difference between JVS Chicago and most other lenders is that a senior credit advisor works closely with entrepreneurs seeking Duman loans to repair their credit to the point where they qualify.
“Because of the way in which a FICO credit score is determined, a score can go down quickly, but usually takes time to improve,” said Sharon Belloff, senior credit advisor. “Yet I have had clients who made fairly simple changes to their payment plans and saw a dramatic improvement in score, to the point where they qualified for a loan.”
Belloff cited a client who paid off one collection, made a few adjustments in payments and saw a significant increase in his credit score.
“It was serendipity,” Belloff said. “As he paid off a collection, another outstanding credit card closed off his account because of elapsed time. He reduced his balances on three credit cards, started paying all accounts on time and kept charging an occasional item to keep his accounts active, with quick payments.”
She advised the client to quit making numerous applications for additional credit, as each additional application reduced his credit score. According to the Fair Isaac Company (FICO) website, “Applying for many new accounts often hurts your FICO® score more than applying for a single new account… our research has shown that people who apply for credit multiple times within a short time period tend to over-extend themselves and are more likely to default at some point.”
The client’s credit score improved so much in just one month that he was able to successfully apply to the Duman Loan Fund.
Stanton Thompson, another Duman Center entrepreneur, took a credit building course taught by Belloff, and less than 10 months later, his credit score also is very good.
“The free help I received was really a blessing,” Thompson said. “The advice saved me a lot of stress and credit card interest I would have wound up paying.”
Low Score Problems
Belloff said that Thompson was eager to see what his credit situation was because he wanted to launch his own business buying distressed property and rehabbing it.
“The inability to get a business loan is not the only adverse effect of a low FICO credit score,” said Belloff. “A low score can impede your ability to rent an apartment, affect employment options, raise your insurance rates, increase your utility deposit and raise interest rates on mortgages, loans and credit cards. A good credit score alone won’t guarantee that a lender will give you a loan, but you’re dead in the water without it.”
Thompson is now moving forward with his dream of starting a real estate company, developing a business plan and honing other entrepreneurial skills with assistance from the small-business experts at the Duman Center.
For more information on the Duman Entrepreneurship Center, visit www.jvschicago.org/duman.