Don’t Apply for a Loan Before You Ask a Few Hard Questions.

If you have bad credit, your financing options may be limited and expensive. If you hope to start or a grow a business, you’ll need to learn how to judge the status of your credit score and why it matters to your lender. Even more important, you must explore realistic avenues to fix the problems with your credit history.

Why does bad credit affect my loan options?

Lenders want reliable borrowers. They want to see you repay your debts on time and in full. They want to know you avoid taking on irresponsible amounts of debt. They want to know how many different kinds of credit you have and how long you’ve been borrowing money. Your credit score summarizes this information for lenders, giving them an easy way to evaluate your trustworthiness as a borrower.

Because your business is small, lenders assume you’ll treat your company finances much like you do your own. If you’ve got bad credit, you may discover you don’t qualify for a lender’s larger loan products, low annual percentage rates (APRs) or certain repayment schedules. Financial institutions cimply don’t want to risk that you might not repay a hefty loan.

Your credit score is a major factor in your eligibility, but it’s not the only factor. Lenders also will weigh your business’s revenue against the type of loan you hope to secure and its APR. You should understand the “5 C’s of Credit” that describe how your application will be evaluated and reveal what else might help you secure that loan.

  1. Character. Your credit history and score fall under this category. Fair or not, your past will be used to predict your future.
  2. Capacity. This describes your ability to repay the loan, and lenders will use your debt-to-income ratio and cash-flow statements to learn how your revenue stacks up against your outstanding debts. If your business has a healthy cash flow and isn’t already saddled with debt, you might win the trust of your lender despite that less-than-stellar credit score.
  3. Capital. What investments have you made in your business? Lenders want to be sure you won’t default on your loan. They’re looking for commitment and dedication, and a substantial investment on your part tells a lender you’re serious about the success of your business.
  4. Collateral. This is all about assets — anything the lender could repossess if you default. Those assets might include real estate, equipment, inventory or accounts receivable.
  5. Conditions. Lenders will examine how you plan to use your loan and the broader context of your financial need. They want to see you’ve got a specific purpose for your loan and a vision for growing your business with this capital. They’ll also do some due diligence on your industry (in case it’s about to tank) and your business plan (on the off chance it raises any long-term red flags). If you’ve done your homework to explain how you’ll budget for the loan, you’ll be more likely to win your lender’s trust.

How can I improve my credit?

If you’re feeling discouraged about your credit score, remember it isn’t set in stone. You have the power to start improving it today, even if you’re in debt for the foreseeable future.

The simplest way to maintain a healthy credit score is by making your debt payments on time and in full. This applies to your business loans as well as your personal affairs. Make sure you’re timely with any mortgage, rent, utilities or credit-card payments, as they all affect your personal credit score. Keep your credit use under control. Spend conservatively when using credit, and avoid maxing out all your available options.




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