As a small business operator you may need access to a line of credit, money that can see you through a cash flow problem. Applying for business credit is typically accomplished through a commercial bank, a lender usually well versed in serving the needs of businesses such as your own. From a lender’s perspective you pose a risk, someone who may not be well positioned to pay back what has been borrowed. The following are what banks look at when considering your application.
Your small business poses a greater risk than you might think. The Small Business Administration reports that most small businesses are out of business or sold after 10 years.
Lenders look very carefully at business credit history. If there is a paucity of information on your business, including previous loan history or new credit, then lenders may not be willing to underwrite a loan.
You can counter the bank’s skepticism by submitting a detailed business plan with your request. Your bank may also require a Profit and Loss statement. Indicators of a strong balance sheet include a healthy debt-to-equity ratio, what measures the amount of long-term debt financing related to your company’s capital structure equity. In essence, it demonstrates the relative amount of equity and debt your business is using to finance its assets.
Bad Personal Credit
With an absence of business credit, your lender may ask permission to obtain copies of your credit reports. TransUnion, Equifax and Experian are the three credit reporting bureaus. With your permission your bank will pull up at least one report and obtain your credit score. Your credit score is a three-digit number that represents creditworthiness. A score of 700 or higher demonstrates “good credit management” according to Experian.
If you have bad personal credit, the chances of your receiving business credit are near zero. Thus, before you apply for business credit you should consider your personal credit history. Even if your loan is approved your credit terms will include higher interest rates and more collateral.
You can help your cause by offering sufficient collateral, provided you have control over that asset. This means that if the collateral is equipment, a motor vehicle, building or land, you need to hold its title outright. That means there can be no current lien on the asset.
Collateral provides security for the bank in the event that your business fails. If you are unable to repay your loan, the bank can seize and sell that asset. Often, borrowers put their homes up as collateral. This is a risky move, one that can cause your family to lose a home as your business goes under, a double hit that promises much heartache.
If your business has been established for several years, you have an advantage over the entrepreneur looking for a start-up loan. You have the business history and the balance sheet to show for it. If your collateral is sufficient, then the lender may rule in your favor.