Impact of Credit Issues For Business Owners Regarding Financing For Businesses

A great thank you to Fred Chen of CreditRepairTheSmartWay.com to sit down with us at Just Elementary, Inc. to discuss Credit issues for small business owners.  Fred is kind enough to answer questions that are relevant to business owners about what they are up against when it comes to getting various financing options from banks.

Just Elementary: Late payments are a death knell because they indicate a lack of responsibility on the borrower’s part to fulfill the obligations of the credit issued to them.  Is there a more damaging credit mistake to make than have a history of late payments?

Fred Chen: The only thing that can be more damaging than late payments is for the late payments to turn into bankruptcies or foreclosure of a home.  Otherwise having a history of late payments is a sure way for a creditor to decline the borrower for credit.

Just Elementary: Is one late payment on a long history of on time payments something that can be overlooked?  How about 2, even 3?  When does it get to be too much?

Fred Chen:  When a creditor pulls a borrower’s credit report, the creditor can see every single late payment that is on the report.  If the borrower has a good credit history except for 1 late payment, this can often be overlooked.  However, when there are 3 late payments or more on the credit report, the creditor will start to ask for explanations on each late payment and may be more critical to approve the file.

Just Elementary: Obviously having credit problems is a real impediment for someone looking to secure bank financing for a small business.  Are there certain types of credit score ruining problems that are less worse than others to have.  I suppose this can be rephrased as “are there easier credit problems to fix?”

Fred Chen: Yes, there are credit problems that are worse than others.  To take an extreme look at it, bankruptcies are harder to fix than a late payment. Bankruptcies can stay on your credit report between 7 to 10 years. Everything on your credit report can be removed if you give it enough time. As old debts are paid off and new debts are paid on time, your credit will slowly begin to improve, even bankruptcies and foreclosures.

Just Elementary:  Given the fact that many people have had to go BK, or short sell their personal residence due to obscene prices, what can people who had housing related credit problems do to be able to secure bank financing for small business purposes?

Fred Chen: Bankruptcies can stay on your credit report between 7 to 10 years. Everything on your credit report can be removed if you give it enough time. As old debts are paid off and new debts are paid on time, your credit will slowly begin to improve, even bankruptcies and foreclosures.  While you are in the rebuilding stage, it will be nearly impossible to secure a bank loan.  The alternative is to secure a hard money loan, which are loans given out by third party investors.  The draw back is the interest rate is usually double the interest rate that you can get at a regular bank.

Just Elementary: Entrepreneurs and/or business can have gaps in income history when they are between businesses or projects, how does this affect a credit rating, if at all?

Fred Chen: When a creditor reviews the credit report for an individual or business, they are mainly reviewing the red flags that are the late payments.  As along as there are no major red flags, having a gap in income history will not affect the credit rating.

Just Elementary: How does the equity in the real estate owned by a person affect credit rating, if at all?

Fred Chen: The history of paying the real estate on time will improve the borrower’s credit rating, not the amount of the equity.  On the same token, the history of late payments on the real estate will decrease the borrower’s credit rating.

Just Elementary: For small business owners, how do business lines of credit affect their personal credit rating?  What if they are only personally guaranteeing the business line of credit?  If they are a Sole Proprietor, is a ‘business line of credit’ totally and completely on their personal credit record?

Fred Chen: As an entrepreneur, you have a unique opportunity to build, maintain and acquire credit both individually and as a business owner.  The individual credit will follow the social security number and the business credit will follow the EIN number.  When a creditor looks to approve a small business owner, they typically will look at both the individual and business credit to see if there are any possible red flags.  In the case that there is a late payment, it is possible that the late payment will be recorded on both the individual and business credit.

Thank you Fred for the insight.  Fred can be reached by email fred@creditrepairthesmartway.com

For more information how Just Elementary Inc. Commercial Business Brokers can help you with your small business needs, contact our Client Care Manager, Sonia Chhabra at (888) 926-9193 or by email cs@justelementary.com

A little bit about Fred.  He is the creator behind www.creditrepairthesmartway.com. He graduated with a B.A. in Economics from the University of California-Irvine and has worked in the banking industry for over 10 years. He loves what he does, and says for him there is no better feeling than to help buyers move into their dream homes or assist entrepreneurs with starting their own businesses. Unfortunately, he’s had to turn down more people than he can help and cites as the number one reason: low credit scores.  That prompted him to do something about the problem by doing extensive research on self-credit repairs. He blogs about the most updated credit repair information on creditrepairthesmartway.com/blog