5 Personal Credit Tips for Entrepreneurs and Real Estate Investors

5 Personal Credit Tips for Entrepreneurs and Real Estate Investors

One of the most important factors in getting capital, particularly for startup businesses and investors is personal credit. While alternative finance programs and asset-based lending is available for entrepreneurs and investors who don’t have great credit, having good personal credit can provide an advantage.

Following are 5 of the key metrics entrepreneurs and investors can focus on to improve their credit and increase their options for financing:

Amount of Revolving Credit/Average Line of Credit

One of the key metrics that affect your FICO score and eligibility for funding is the amount of revolving credit that you have on your credit reports. Establishing and building personal revolving credit accounts provides a foundation for future business funding. Entrepreneurs with larger amounts of available personal credit are often approved for larger amounts of business credit.  

Your Credit History (15%) and Credit Mix (10%) together account for up to 25% of your credit score. The longer your credit history, and the more diverse the types of accounts you have including car loans, mortgages, credit cards, and student loans, the stronger your score will be.

Credit Utilization

The percentage of available credit utilized on your credit report is one of the most important factors affecting an entrepreneur’s credit score. The amount owed accounts for up to 30% of your credit score.

At Alliance Commercial Finance, we teach our clients that 30% utilization is good, 20% is better, and 10% or lower is best! Business Owners and investors that have credit utilization higher than 30% can increase their credit scores and enhance their credit profile and opportunities for funding by simply lowering their credit utilization rate. There are generally two ways to lower your credit utilization, one is by increasing your available credit, and the second is by lowering your existing balances. There are several strategies for both options which we will explore in a subsequent article.

Debt to Income Ratio

There are different ways that lenders look at debt to income ratio. Mortgage lenders will look at the percent of your income required to service your mortgage payment in addition to your overall debt to income ratio. Most mortgage lenders set the maximum debt to income for mortgage payments at 28%. Most lenders like to see 36% or less for your overall debt to income ratio. While Debt to Income does not impact your FICO score, it is still a key factor in qualifying for business and real estate financing. 43% is typically the maximum debt to income ratio to qualify for a traditional mortgage.

As a side note for real estate investors, many private mortgage lenders that finance real estate investment properties do not require income verification and do not look at the borrower’s debt to income ratio when approving a real estate investment loan. Rather, it is the property’s debt service coverage ratio that is the key determinant in whether the loan is approved. We’ll get into this in another article as well.

Inquiries

When you apply for credit with a bank or lender, the application process will typically include your authorization for that bank or lender to obtain a copy of your credit report from one or more of the three major credit bureaus – Experian, Equifax, and Transunion. Hard Inquires are formal requests from a lender to pull your credit file and show up on your credit report, while soft inquiries are not reflected on your reports and do not affect your credit score.

While hard credit inquires can account for up to 10% of your credit score, they can more importantly be a cause for a decline in a credit application if there are too many inquiries on your credit report. Credit inquires can often be explained when applying for a mortgage or a loan, however when applying for unsecured business lines of credit in particular, your application can be automatically declined if the amount of inquiries on your report exceeds the maximum amount set by the bank or lender.

Payment History/Derogatory Accounts:

Payment history accounts for up to 35% of your credit score. Accounts with late payments, major delinquencies, or collections can obviously have a large impact both on your credit score and your ability to qualify for funding.

While one late payment can often be removed by request from a lender if a borrower has an otherwise good payment history, major delinquencies and collection accounts can pose a barrier for entrepreneurs and investors seeking funding for their business and real estate investments.

Alliance Commercial Finance partners with highly efficient and effective credit repair partners to assist in addressing late payments, derogatory accounts and collection on our client’s credit profiles if necessary.

At Alliance Commercial Finance, we specialize in assisting entrepreneurs and real estate investors in establishing and building both personal and business credit to maximize eligibility for funding.

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