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A White Paper by QuickSpark Financial
A White Paper by QuickSpark Financial
Table Of Contents
1. Overview
A. How FICO scores influence the lending decision
2. Introduction
A. What is a FICO score? What does it mean to me? Why is it important? B. Factors that determine FICO score C. The average FICO of Americans
3. The Benefits Of A High FICO Score For Equipment Financing
A. Less likely to get rejected for financing B. Lower interest rates C. Get approved for more expensive equipment 4. The Disadvantages Of A Low FICO Score For Equipment Financing
A. Risk to lender B. High overall costs
5. FICO & Startup Businesses
6. Conclusion
1. Overview
Often, owners of small businesses do not understand their own personal FICO credit score – and how this impacts their ability to finance equipment purchases, get business loans, and more. In this white paper, we’ll review the impact FICO scores have on determining monthly payments for equipment purchases.
A. How FICO scores influence the lending decision
Personal FICO scores are one of the most important factors when banks, vendors, and other lending institutions decide to make a lending decision. Essentially, a FICO score is a metric that determines the overall financial health of an individual – and how well they have been able to repay their past debts.
In the next section of our white paper, we’ll discuss the basics of FICO scores, so that you can understand them on a deeper level.
2. Introduction
FICO scores were first developed, as the name implies, by a company named the Fair Isaac Corporation (FICO), an analytics company. Today, FICO scores are used by most credit rating institutions. It has been estimated that 90% of all lending decisions incorporate a FICO score in some way.
A. What is a FICO score? What does it mean to me? Why is it important?
A FICO score provides an “at-a-glance” view of your financial history. It consists of information such as outstanding debts, debt utilization, past financial issues (car repossessions, bankruptcies, debts sent to collections, unpaid bills, etc.).
By combining all of these factors, a FICO score allows an institution such as a bank to determine the risk of lending to a particular individual.
For example, if you have no outstanding debts and are free of financial difficulties, you are a low risk – and will have a high credit score. However, if you have struggled with debt in the past, your FICO score will show that you are more risky – and it will be lower.
Another example is if you do not have significant credit history, but have a good FICO score, you might also be considered a “high risk” since you haven’t proved your ability to borrow and repay debts.
FICO scores are important because they are the primary factor that banks and other institutions use to determine whether or not they will lend money to you – and what interest rates you will get.
Simply put, the higher your FICO score is along with a solid history of being current with your trade lines, the more likely you are to be able to get loans at good interest rates. The lower it is, the more difficult it will be to get loans – and you may end up paying higher interest rates.
B. Factors that determine FICO score
There are a number of factors that determine your FICO score. You can be scored from 300-850 – 350 being a very bad credit score, and 850 being a perfect credit score.
1. Past payment history - Your payment information for all credit cards, loans, and other debt instruments. 2. Outstanding debts owed - The total amount you owe on all debt accounts. 3. Credit history length - The length of time during which you have established accounts and used them. 4. Credit mix - The mix of credit accounts you have – from revolving accounts like credit cards, to installment payments such as mortgages, student loans, and auto payments. 5. New credit applications - Actions done in recent pursuit of new credit, such as seeking a car loan, opening new credit cards, or getting other loans. 6. Depth of your credit history - If you only have a couple of tradelines with minimal credit limits then it’s considered thin credit.
C. The average FICO of Americans
The average FICO score in America recently hit an all-time high. In 2017, the average credit rating of Americans was 695 – which is considered to be a fair score. Since different scoring models exist, this can cause the number to fluctuate a few points, most fall between 660 to 720.
Credit scores typically break down in the following manner:
• 720 or more: Excellent • 660 - 719: Average/Fair • 620 - 659: Poor • 620 or lower: Bad
3. The Benefits Of A High FICO Score For Equipment Financing
A high FICO score is beneficial in almost any situation where you need to borrow money – and this includes equipment financing. Here are a few benefits of having a high FICO score when financing equipment.
A. Less likely to get rejected for financing
A high credit score means that you are a low risk to lending institutions. You have a history of repaying your debts, and have very little debt that is outstanding, unpaid, or has been sent to collections.
This means that you are much more likely to be approved for loans when you apply for them. This is true when financing a home with a mortgage, and it’s also true when financing equipment for a small business.
Simply put, the higher your credit score is, the more willing lenders are to work with you – and approve your application for financing.
B. Lower interest rates
Interest rates are one of the main ways that lenders balance risk. The riskier an individual is to lend to, the higher their interest rates will be. This is because the lender has to take the risk that an individual will not repay their debt – to make it worth their while, they will charge much higher interest rates.
The opposite is also true. Individuals who are trustworthy and have high FICO scores can expect to get better deals on loans. Interest rates will be lower – making the overall cost of purchasing equipment much lower.
Lower interest rates can also allow individuals to take out shorter-term loans and afford the monthly payments, further lowering the total cost of an equipment purchase.
C. Get approved for more expensive equipment
An individual with a 500 FICO score will probably not get approved for a large equipment purchase, even if they appear to be financially stable.
However, someone with a very high FICO score would qualify for a higher loan amount. They have proven their ability to repay debts – and banks are willing to take a risk on them, because they have been reliable and responsible in the past.
4. The Disadvantages Of A Low FICO Score For Equipment Financing
Just as high FICO scores have a number of advantages, lower FICO scores have a number of disadvantages.
A. Risk to lender: proposal may be rejected
The riskier an applicant is, the less likely they are to be approved for credit. Individuals with low credit scores have proven that they cannot manage their own finances – and even if they have managed to recover from serious financial difficulties, their FICO score will take time to rebound.
A low FICO score means a high risk. While some lenders will work with low FICO individuals, most lending institutions steer clear entirely, unwilling to risk a failure to repay a loan.
B. High overall costs
Individuals with a low FICO score will face higher costs, overall, compared to people with higher credit scores.
The primary reason for this is high interest rates. High interest rates help lenders mitigate risk.
5. FICO & Startup Businesses
A good personal FICO score does not always mean great rates and lending approvals especially if you are a startup business. If a business is less than two years old, the risk is high for the lender. According to Fast Company, 75% of venture-backed startups fail within 5 years. The majority of financial institutions see startups as a high risk due to their short history and limited assets.
6. Conclusion
FICO scores are not the only metric used in lending decisions. However, they are a very useful tool for understanding the creditworthiness of an individual – both in personal situations, and when dealing with businesses.
Now that you understand how FICO scores work, and what they do, it will be much easier for you to understand how lending companies make decisions, and why individuals with lower credit may have to pay higher interest rates – or fail to qualify for loans altogether.
For more information, please contact QuickSpark Financial at:
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