Most entrepreneurs know that a good credit score is one of the most important business loan requirements. A high credit score can mean a quick approval from the lender at a reasonable rate of interest. An average or low score can have the opposite effect. Your business loan requirements may be denied leading to cash flow issues and missed opportunities.
Small business owners must do everything within their power to maintain their credit score at a respectable level thus complying with the business loan requirements. Before we get into the subject of how you can do this, it’s important to understand the difference between a personal credit score and a business credit score.
Personal credit score and business credit score – what’s the difference?
- Your personal score is linked to your Social Security Number or your Taxpayer Identification Number (TIN), while your business credit score is connected with your Employer Identification Number (EIN).
- It is likely that your personal credit score will be represented by your FICO score. This ranges from 300 to 850. There are several types of business credit scores with the Dun and Bradstreet score having the greatest acceptability. This is calculated on a scale of 1 to 100.
- Your personal credit score reflects your individual transactions while your business score indicates the financial strength and repayment capacity of your company.
- When you apply for a business loan, most financial institutions will focus on your personal credit score, and not your business credit score, when they are evaluating your application. If you have a high FICO score, your chances of successfully meeting your business loan requirements improve considerably. For that reason, in this blog, we will focus exclusively on your personal credit score.
What does your credit score say about you?
Let’s view the process of granting a small business loan from a lender’s perspective. When your loan application is being considered, what is the bank’s primary concern? To validate that you will repay the loan on time.
A FICO score helps them to do just that. So, if your FICO score is, say, 500, will a lender be willing to meet your business loan requirements? What if a prospective borrower has a higher credit score of 700?
Simply, look at this table to see what your score tells your lender about you:
As you can see, your credit score is like a cover letter: it creates an impression on your lender and he will use to guess the probabilities you have to fail to pay back your debt. But how do these numbers translate in terms of the type of loan you can get and the interest you’ll receive? To answer that question, just check the table below. Please bear in mind that these are only approximations and that a financial institution may decide to charge higher or lower rates, or not provide finance at all. A lender’s decision will depend on its underwriting policies. Also, rates vary significantly between loans that are secured with collateral and those that are unsecured.
How can you improve your credit score?
As you can see, a low score could limit your loan options. It may also lead to an increase in your borrowing costs.
Fortunately, it is possible to improve your credit score. Let’s say your score is in the 500s or a little higher, how can you increase it?
- Pay your debts on time. Even a few days delay could negatively impact your credit score.
- Don’t max out your credit cards. Keep your utilization at about 30% of your credit limit.
- Limit the number of credit applications that you make. Every hard inquiry can have the effect of dropping your credit score.
- Finally, remember to check your credit report regularly for errors. If you do find an inaccuracy in your report, you should initiate a dispute and get it rectified.
But remember! There are other business loan requirements besides your credit score
Remember that your FICO score is only one of the business loan requirements. Which are the other considerations that a lender takes into account when appraising your business loan requirements? Although every financial institution will have its own set of underwriting rules, these are some of the factors to consider:
- The loan amount that you have requested.
- The purpose you have for the loan.
- Your financial statements.
- The amount outstanding on your existing loans.
- The cash flows of your business.
The bottom line
Your credit score plays a significant role among the business loan requirements. Both the availability of credit and the interest rate are likely to be influenced by this factor. It’s vital that you monitor your score closely and take the steps that are necessary to improve it.
Even if your credit score is relatively low, Camino Financial can help you to fulfill your business loan requirements. If you have a minimum credit score of 550, you are eligible to apply. The annual interest rate that you have to bear could be as low as 12%. All that you have to do when you submit your application is providing some information about yourself and your firm. A loan specialist from Camino Financial will contact you and guide you through the process of raising the money you need.
Applying requires only a few minutes, and Camino Financial does a soft pull on your credit. This won’t affect your FICO score.