- Posted by: Administrator
- Category: Finance
If you have bad credit, your financing options may be limited and expensive. Learn how to judge the status of your credit score, why it matters to your lender, and what you can do to fix it in the future.
Why does bad credit affect my loan options?
Lenders want reliable borrowers. They want to see that 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 the size of your business is small, lenders assume you’ll treat your business’s finances like you do your own.
If you’ve got bad credit, you may find you don’t qualify for a lender’s larger loan products, low APRs, or certain repayment schedules. Lenders don’t want to take the risk that you may not repay a hefty loan.
What else can help me get that loan?
Your credit score is a major factor in your eligibility, but it’s not the only factor. Lenders will also weigh your business’s revenue against the type of loan you’re applying for and its APR.
The 5 “C’s of credit.
You should also 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. Those 5 C’s are character, capacity, capital, conditions, and collateral.
Character includes your credit history and score.
Capacity describes your ability to repay the loan. 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 may win the trust of your lender despite that less-than-stellar credit score.
Capital shows the investments you’ve made in your business. Lenders want to be sure you won’t default on your loan. They’re looking for commitment and dedication. If you have had a substantial investment in something it tells a lender you’re serious about the success of your business.
Collateral is all about assets. Anything the lender could repossess if you default. Those assets might include real estate, equipment, inventory, or accounts receivable.
Conditions describes how you’ll use your loan and the broader context of your financial need. Lenders want to see you’ve got a specific purpose for your loan and a vision for growing your business with this capital.
They also want to be sure your particular industry isn’t about to tank and that your business doesn’t raise any long-term red flags. If you’ve done your due diligence on budgeting for and utilizing this 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 that it isn’t set in stone forever. You have the power to start improving it today, even if you’re in debt for the foreseeable future.
How to keep a healthy credit score.
The simplest way to maintain a healthy credit score is by making your debt payments on time and in full. Don’t just worry about your business loans. Be dedicated in making sure you’re timely with any mortgage, rent and utility, or personal credit card payments. Each one of these payments will all affect your personal credit score.
Keep your credit utilization under control. Spend conservatively when using credit, and avoid maxing out all your available options.
SOURCE: THE ENTREPRENEUR