Personal “Beacon Score” Matters When Financing Your Business
Think your personal credit score doesn’t matter when you seek financing for your small business? Think again…
Financial institutions use the “Five Cs of Credit” to determine the “credit worthiness” of business owners (meaning their ability to borrow money and repay it). These five Cs are:
- Character
- Capacity
- Capital
- Collateral
- Conditions
The last four are all easily measured by an entrepreneur’s business plan and the assessment of that individual’s net worth, education and work history. Character is harder to quantify, so financial institutions use a couple of measures – including a beacon score – to assess character.
What’s a Beacon Score?
A beacon score is a credit report summary of an individual’s credit history. The report shows all outstanding credit (such as bank and car loans, credit cards and lines of credit), and how well you’ve kept up with repaying those loans. It also shows the total available credit, and lists all the places where you have inquired about getting credit (for example, a cell phone provider).
In a nutshell, a beacon score tells the story of an individual’s past and current credit history. Lenders use this as a predictor of future behavior; if someone has a history of missed or late loan payments, the beacon score will be low.
Why Your Beacon Score Matters and How It Changes
A beacon score ranges between 400 (terrible) and 900 (outstanding). Typically, financial institutions won’t lend to someone with a score under the mid 600s. Individuals with scores between 620 and 650 may get a loan, but would likely require more security (such as a larger lien over an individual’s assets), or pay a higher interest rate.
Other tools lenders use to assess credit worthiness are affected by your beacon score. The "bankruptcy navigation index" (BNI) predicts the likelihood of future bankruptcy, and a good beacon score can help ensure your BNI rating is in a positive range.
Your beacon score changes over time. The most important contributors to these changes are:
- Payment history on loans and credit cards
- Amount of outstanding and available debt
- Any bankruptcy history
Whenever you apply for any kind of credit, the provider will ask you for consent to access your credit report. The provider will use the information to approve or decline your request. If you obtain credit, the provider will report to the credit agency on how that credit is used over time.
Improving Your Beacon Score
In the early years of a business, credit access to capitalize operations or buy equipment can be critically important. Without a credit report for lenders to “score” a loan application, you won’t be able to borrow funds from a regular financial institution. A few institutions might look beyond a bad credit report (if there’s a good explanation for the low score), but it’s very unusual.
How can you improve your beacon score and move it into the range lenders like to see?
- Always pay bills on time and pay at least the minimum or better yet, the entire amount owing.
- Don’t hold excess credit. Use only one or two credit cards (and stick to the lowest possible interest rate card).
- Don’t seek excess credit. Applying for new credit, or switching between cards (because of low rate enticements) will hurt more than help.
- Ask for a copy of your credit rating annually. If you spot an error, ask the credit agency to fix it.
Easy Tip to Build Your Beacon Score
For individuals (such as newcomers to Canada) who don’t yet have a credit score, one of the quickest ways to build good credit is to apply for a cash-secured credit card, and use it to make small monthly purchases with the entire balance paid off each month. This will soon build the kind of beacon score that lenders like.
