Great Credit Key to Growing your Business
Photo: eminentcreditonline.com
By Sheila Gibbons Hiebert
Thinking of starting a business? Or expanding one? Remodeling or enlarging your offices or planning to acquire or build new ones? At some point you’ll have to borrow funds to fulfill your ambitions. Before you can shake hands with a lender over a loan, be sure you’ve maximized a number that will influence how much your loan will cost you – or even if you’ll be approved for one. That number is your credit score.
Many banks use business owners’ personal credit scores to help evaluate their eligibility for a business loan and the terms that will be set for repayment. Especially if a business is just getting off the ground, or has a relatively short track record, the owner’s credit score will be an important piece of the equation – some experts say the most important piece – for the lender.
The lender will look at other factors, too, says Barbara Horn, president/CEO of Cedar Point Federal Credit Union (CPFCU) in Lexington Park. Applicants should be prepared to demonstrate quality in terms of equity, experience, a business plan, cash flow, cash ratio, and collateral, along with a sterling credit score. Lenders will also look at prospective borrowers’ competition to make a judgment about their prospects for success. CFPCU uses a grading system based on all these factors, plus scores from the major credit reporting agencies, and a local CPFCU committee makes the decision about granting loans, Ms. Horn says.
What’s considered a sterling score? A loan applicant with a score near or above 700 (on the 300-850 point consumer credit scale) will probably get the nod, all other indicators being favorable. If the company has been in business for a while (and has its own tax identification number and legal name), it may have its own credit score. Business credit is scored differently, on a zero-to-100 scale. A business credit score of 75 is considered a good benchmark for loan prospects.
Lenders raise the bar higher for business loan applicants because the risk is greater than with most consumer loans. Defaulting on car or home loans allows the lender to take possession of the asset and liquidate it. This doesn’t pose much difficulty because there’s an ongoing market for those items. But if the asset is a business, liquidation is more complicated and can be an expensive headache for a lender.
“The first thing a person seeking a business loan needs to know is that they are going to be held personally responsible as well. This is probably the biggest thing applicants don’t know when they come to see us,” Ms. Horn says. “They need to be prepared to bring in many documents to proceed with the loan: two years of federal tax returns, corporate resolutions and articles of incorporation, personal financial statements, paperwork for the federal EIN they obtained at the inception of the business. But if they won’t agree to be a personal guarantor, we won’t do it.”
Before approaching a lender, it’s vital that applicants obtain their credit reports (from Experian, Equifax, and TransUnion) and review them for errors. If necessary, clean them up before beginning a dialogue with a lender.
Mike O’Brien, of O’Brien Realty, Lexington Park, experienced in commercial and residential real estate transactions, hammered home the importance of a positive personal credit history in a recent blog post:
“Once you know your score, you can take steps to address any issues on the report. Pay down revolving consumer debts, such as credit card balances and auto loans. Report any errors on your credit report so they can be adjusted. Pay bills on time and address any notices of collections before they make it onto your permanent record. If you will be applying for a loan soon, avoid opening any other credit accounts for the time being.”
However, “some people are too cautious with their credit and think closing accounts or avoiding credit entirely will make them more attractive to lenders,” Mr. O’Brien says. “But this can backfire. Lenders will want to see a strong credit history that indicates your ability to pay your debts on time.”
Lending to small businesses declined dramatically during the recent recession. Underwriting rules were tightened up as bankers worked to repair their shredded balance sheets. Business owners pulled back, too, reluctant to take on more debt. As the tide has gradually turned, business owners are again seeking financing. They are finding lenders still cautious, offering smaller loans than many applicants are seeking, according to a recent Wall Street Journal analysis. But CPFCU’s Ms. Horn offers encouragement.
“Credit unions tend to work more on a personal basis. We’re here to make a loan, not deny a loan,” she says. “We’ve done many things, have come up with different scenarios, for people to try to qualify for a loan.”
If you’re in the market for a business loan, remember that you can’t be too prepared when approaching a lender. Those who ultimately are awarded the financing they seek will have to demonstrate personal and professional financial stability, excellent prospects for commercial success – and a superb credit rating.
Source: LexLeader.NET
