Understanding Midprime Credit Scores: A Guide for Small Business Owners

Understanding Midprime Credit Scores: A Guide for Small Business Owners

Understanding Midprime Credit Scores: A Guide for Small Business Owners

  • For small business owners, personal credit score can still matter in determining which small business loans and business credit cards you qualify for.
  • A midprime, or near-prime, credit score falls between prime (which is good) and subprime (which is poor). 
  • This article explores how having midprime credit affects you, credit options for midprime borrowers, and how to build your credit over time.

What Is Midprime Credit?

Midprime credit, also called near-prime credit, refers to a credit rating from the three biggest credit bureaus. A midprime score falls between prime (good credit) and subprime (poor credit). Credit scores are three-digit numbers (usually from 300 to 850) that rate an individual’s or a business’s creditworthiness. Lenders use your score as one indicator of how likely you are to repay what you borrow on time. 

Because of this, consumer credit scores play a crucial role in determining the terms and availability of personal and business credit, such as loans, credit cards, and other financial products. 

For midprime borrowers, credit options might not be as favorable as those available to prime borrowers, but they typically have more options and better terms than subprime borrowers. Lenders might offer midprime borrowers loans with slightly higher interest rates or require additional documentation to assess creditworthiness. However, improving credit behaviors over time can help midprime borrowers move into the prime category and access even better credit options.

Midprime Credit Score Range

Midprime credit falls in the middle range between prime and subprime. While definitions can vary among lenders and credit reporting agencies, the Consumer Financial Protection Bureau (CFPB) breaks down credit scores this way:

  • Super prime credit score: 720+
  • Prime credit score: 660 to 719
  • Near-prime credit score: 620 to 659
  • Subprime credit score: 580 to 619
  • Deep subprime credit score: Below 580

FICO score and VantageScore are the two most popular credit score ratings. Near-prime borrowers might have a mix of positive and negative credit history.

Characteristics of Midprime Borrowers

Midprime borrowers often exhibit certain characteristics that position them between prime and subprime borrowers in terms of creditworthiness aside from credit scores. These can include:

  • Credit history: Midprime borrowers may have a credit history that includes both responsible credit management and occasional instances of missed payments, late payments, or other minor credit issues. They might have a history of managing various types of credit accounts, such as credit cards, loans, and mortgages.
  • Debt-to-income ratio: The debt-to-income (DTI) ratio compares a borrower’s monthly payments to their monthly income. Midprime borrowers might have a moderate DTI ratio, indicating that they have a manageable level of debt relative to their income.
  • Payment behavior: While midprime borrowers might have some late payments or credit delinquencies in their history, they generally make an effort to meet their financial obligations on time. This distinguishes them from subprime borrowers who might have a more inconsistent payment history.
  • Credit mix: A diverse credit mix, including a combination of installment loans (like business lines of credit, auto loans, and student loans) and revolving credit (like business credit cards), is often seen among midprime borrowers. This diversity can indicate a certain level of financial responsibility and experience.
  • Limited negative events: While midprime borrowers might have a few negative events on their credit reports, these events are usually not severe or frequent enough to classify them as subprime. They might have taken steps to address past credit issues and are actively working on improving their credit health.
  • Stable employment and income: Midprime borrowers often have stable employment and a consistent source of income. This stability contributes to their ability to make regular debt payments and meet financial obligations.
  • Desire for improvement: Many midprime borrowers are actively working to improve their credit scores and financial situations. They might be seeking opportunities to build positive credit history and demonstrate responsible credit behavior.
  • Interest in credit education: Small business midprime borrowers might seek out resources and information related to personal and business credit management, budgeting, and financial planning. They’re interested in understanding how to navigate the credit landscape more effectively.
  • Balancing act: Midprime borrowers often find themselves in a balancing act between maintaining positive credit behavior, managing existing debt, and addressing any past credit missteps. They’re aware of the impact of their financial decisions on their creditworthiness.

Midprime borrowers can take proactive steps to improve their credit over time, gradually moving toward the prime category and accessing more favorable repayment terms. Learn how to establish business credit in this comprehensive guide from Nav.

Credit Options for Midprime Small Businesses

Midprime small businesses often find themselves in a unique position when it comes to credit options. They may not have the credit scores or history to qualify for the best terms offered to prime borrowers, but they are also not in the subprime category. As a result, they need to explore credit options that cater to their specific needs. Here are some credit options for midprime small businesses.

Business cards

Business cards can provide a convenient and flexible way to manage expenses, track spending, increase cash flow, and separate personal and business finances. Using them can help you streamline purchasing processes while maintaining control over expenses. Business credit cards or business charge cards can come with rewards programs, offering cashback, travel rewards, or points for business-related purchases. Additionally, they can help establish and build business credit history, which is crucial for accessing larger loans and favorable financing terms in the future. 

Keep in mind that they may come with higher rates and fees.

Here are some of the best business credit cards or business charge cards issuers are offering to borrowers with midprime credit, including the card built into Nav Prime.

Business credit cards

Business charge cards

Online lenders

Online business loans can provide streamlined and convenient application processes, often with quicker approvals and disbursements compared to traditional banks. They also tend to have more flexible eligibility criteria, making them accessible to businesses with varying credit profiles. You may be able to get a range of loan products, from working capital loans to lines of credit, allowing your business to choose the option that best fits your needs. 

Invoice factoring

Invoice factoring, or invoice financing, is a financial arrangement in which a business sells its outstanding invoices or accounts receivable to a specialized company, known as a factor, at a discount. This allows the business to receive immediate cash flow rather than waiting for customers to pay their invoices, which can improve cash flow. The factor then assumes the responsibility of collecting payments from the customers. 

While the business receives a reduced amount upfront due to the discount, it gains the advantage of immediate funds to cover operational expenses or invest in growth. Invoice factoring is particularly useful for businesses facing cash flow challenges or those looking to avoid the delays associated with waiting for customers to settle their invoices.

Merchant cash advances 

A merchant cash advance can provide a lump sum of cash upfront in exchange for a percentage of your future credit card sales. However, a business cash advance may not require you to have credit card sales. While convenient, they can have high interest rates and should be used cautiously.

Microloans

Microlenders are often nonprofit organizations that specialize in providing small loan amounts to businesses that might not qualify for traditional bank loans. They can offer more personalized support and flexible terms.

Tips for Midprime or Near-Prime Small Businesses

Here are some tips for growing your credit score and getting the best rates and terms on your next small business loan.

  1. Pay bills on time: On-time bill payment is the most important factor in setting your credit scores, so make sure you pay on time — or early — at every due date.
  2. Maintain low credit utilization: Your debt utilization is how much debt (like a credit card balance) you have compared to your credit limit (or available credit). It’s a good idea to keep it under the 20% to 25% mark when possible.
  3. Wait it out: Having patience is key when it comes to building credit, especially if you have negative items on your credit reports that you can’t get rid of. With time, these will become less impactful.
  4. Explore credit-building business loans if needed: If you can’t yet find a business loan with the right terms or rates, consider options that can help build up your credit scores and use them responsibly. Credit-building options can be easier to qualify for and can be affordable if you keep usage low to avoid heavy fees.

Graduating to Prime Borrower Status

You can improve your credit scores by following these simple strategies:

  • Give it time: It takes time to move up to a better credit score category — it won’t happen overnight.
  • Create a solid payment history: On-time payments are the biggest factor in determining your credit score.
  • Pay down balances: Pay off what you owe, even if it’s slowly. Even a small amount at a time can make a big impact.
  • Consolidate debt: Consider combining high-interest debt with one that offers a lower interest rate.
  • Limit credit inquiries: Applying for multiple loans or credit cards within a few months of each other can lower your credit score.
  • Build up business revenue and assets: Some lenders require a specific amount of revenue before they will lend to your business. 

The Final Word

Responsible habits are the most important part of maintaining your credit. Responsible small business loan and credit card usage can help you to build credit over time. Using Nav is the easiest way to simplify the search and see the best business loan options you can qualify for, before you apply.

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This article was originally written on December 6, 2023.

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