When You Must Borrow Money to Grow Your Business,
Part Four: The Credit Bureau Report
As we are either starting or expanding our direct farm marketing businesses,
the inevitable dilemma occurs:
"I don't have enough capital to do it right. Should I borrow, or should I just start small?"
 Note: This is the fourth of a series of articles about this timely dilemma, based on a series of interviews with Dennis Lawson, who works with Kansas farms and ranches for Frontier Farm Credit. To read part one, click here.
In the previous articles in this series, we talked about the financial documents that should be reviewed with your loan officer, and then we talked about developing the cash flow projections that give both a good indication as to whether or not to proceed with securing a loan to start up or expand your new operation. You can review these articles by going to the "Ask the Expert" page, and scrolling down to the articles section.
In this article, we want to briefly look at the Credit Bureau Report, and why it is important to the lending agencies that are evaluating your project with you.
If you’ve never heard of a credit bureau, these are for-profit companies, managed by their shareholders with no connection to the government. Credit bureaus gather consumer credit information by soliciting creditors such as credit card companies, banks, and lenders to join their systems and contribute their credit experience on consumers to the systems.
In return for submitting information to the systems, creditor members may use the system to obtain credit information on consumers to approve credit decisions or review existing consumer accounts. Credit bureaus are generally regulated by the Fair Credit Reporting Act (FCRA), which is the Federal law covering credit bureaus and credit reporting in this country.
There are three major national credit bureaus, Experian, Trans Union, and Equifax. Since these are for-profit companies, they do not generally share information, and that’s why your lender may check your credit history with more than one bureau.
The report checks your credit history, reports discrepancies such as a missed payment, and gives an overview of how well you manage credit… especially the plastic kind. In addition to this information, the Credit Bureau Report provides a credit score, indicating whether your credit history reflects a low, moderate, or high risk.
The credit score is computed based on:
- Your payment history (35% of your score)
- Amounts owed (30%)
- Length of credit history (15%)
- Types of credit used (10%)
- New credit (10%)
A credit score of 725 or more points is considered a low risk, while a modest risk falls in the range of 650-725 points. If a credit score falls below 650 points, it is considered a high risk score.
So how can you affect or improve your Credit Score?
- Verify that everything in the report is accurate. There are sometimes discrepancies
- Pay your bills on time
- If you missed a payment, catch up and stay that way
- Paid collections (even medical) stay on your credit report
- Keep low balances on credit cards and other revolving accounts
- Don’t open many new accounts at once
- Pay off debt – don’t move it around
If you have questions or concerns about your credit report, talk to your financial lenders. Find out how to improve your ratings, and how to compensate for a negative score in the past.
Note: A recent federal law entitles you to a free report from each of the three bureaus at least once every twelve months. Among other places, you can access these reports at http://www.annualcreditreport.com. This website also provides answers to many of the frequently asked questions. Two things we would mention about these online reports:
Two of the three bureaus use highly specific questions to verify your identification, and these have sometimes prevented people from accessing their reports from these bureaus. Secondly, while the reports are free to consumers, they do not show your credit score unless you pay an additional amount.
In our final article, we’ll look at what Dennis calls the “5 C’s” and how the lender brings together all the information available to ultimately approve, or postpone making the loan for your farm operation. We hope you’ll be looking for that article next month.
If you have immediate questions or would like to know more about the services of Frontier Farm Credit, give Dennis a call, at 800-935-3081
Proceed to Part Five: The Five Credit Factors
When You Must Borrow Money, Part One- Selecting A Lender Who Shares Your Interests
When You Must Borrow Money, Part Two- Understanding Assets and Liabilities
When You Must Borrow Money, Part Three- The Income Statement and Cash Flow Analysis
When You Must Borrow Money, Part Four-Credit Bureau Report & How to Improve Your Credit Rating
When You Must Borrow Money, Part Five-The Five Credit Factors
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