Recent reports show that over 63 percent of business owners attempt to gain funding through a bank. Unfortunately, those who received a loan were less than 27 percent. Yet, the SBA reports that 73 percent of small businesses depend on financing in order to successfully operate.
What was the primary difference between those who were approved for business funding and those who were denied? Experts say that small business owners who are considered creditworthy had an easier time obtaining a loan from a traditional bank. Unfortunately, many small business owners are still facing credit complications as a result of the recent financial crisis. The truth is, that it is difficult for small businesses, even with a fantastic credit portfolio, to obtain financial support from a traditional bank than it is for larger enterprises.
Obtaining access to capital is the single most significant roadblock small business owners face. A business loan can foster start-ups, expansion efforts, and business growth. So how exactly is your credit score factored into your business loan application?
Your credit score is a critical component lending specialists and banks use when considering whether to grant your small business funding. Your credit score is a direct reflection of your financial capability and how well you handle money. A bank may interpret a low credit score as an application which does not possess the right skills to effectively manage finances, especially for that of an organization.
If you have an existing business, it’s essential that you monitor your business’s credit score. This score represents your business’s financial responsibility separate to that of your own. Factors that go into determining your business credit score is your available credit, credit history, and how often you pay your bills. Business reporting uses a 0 to 100 numbering system. A score of 75 is considered “good” to lenders. Anything below this is not particularly favorable to receive funding.
Your personal credit score can affect obtaining a business loan just as it would a personal loan. A score less than 640 will inhibit you from finding a lender at a larger bank. A score of 700 or greater, however, puts you in a much better place regarding approvals with favorable interest rates. Because business loans are more significant than personal loans, a score as close to 800 as possible is going to help meet and exceed stricter lending standards.
To receive a business loan based on personal credit alone, lenders are going to want to see an incredibly strong credit history. To raise your financing chances, business owners should build up a substantial business credit history in addition to positive personal credit history, before deciding to apply for a loan. For faster results, start building business credit before operations by working with creditors and vendors who report to all three credit agencies.
Make sure to establish your business and personal credit history separately by incorporating your business and applying for a federal identification number or EIN. This will work as a sort of social security number for your business. Creditors and vendors will use this number to report your lending habits and payment history. Mixing your personal and business credit histories could lower your score and prevent you from building business credit history.
If your credit is less then perfect and you are having difficulty getting a loan, consider a local or community bank over one that is nationwide. If your business has an acceptable rating, local banks may be more likely to overlook a lower personal score. Some lenders also exist that lend money specifically to those with poor credit. However, interest rates with these companies are generally high.