In order to qualify for a term loan, the lending institution or bank will run a thorough credit check on the applicant to determine the FICO score. Those who have too much debt, or a history of paying their bills late, can have a low FICO score.

Though banks are responsible for managing the risk they take on when issuing personal or small business loans, some consumer advocacy groups such as the Consumer Financial Protection Bureau argue that the current formula is too restrictive. One of the major causes of debt for consumers is medical debt. Consumer rights advocates argue that medical debt is different from other types because of its restrictions.

A Win for Many Seeking Long or Short Term Loans

The new FICO calculation, which won’t be adopted by major banks for several months or even years, will no longer include medical debt as part of its credit score calculation. This will enable applicants seeking short term loans or small business funding to qualify for said financing even if they have medical debt. The new FICO formula will also overlook an emphasis on debt collections agencies. Many believe this move will help encourage people to pay off their debt.

Invoice Factoring and Other Options Exist for Small Business Funding

Businesses with poor credit scores can get small business financing through alternative means such as invoice factoring. Not based on FICO score calculation, factoring receivables enables businesses to sell their most current invoices for cash or a line of credit in 2-3 days. Funding small businesses with invoice factoring is preferred by many companies because it’s an off the book transaction, and the company does not incur any new debt as a result.