Does your small business have a credit score? If you’re unsure, how can you find out? If you’ve ever started a line of credit for your company – even if it was just a small business card – you’ve already been building credit and thus have a score.
Much like your personal accounts, your business credit score can help you get approved for a loan easier, get better terms and can increase the credit limit on your cards. Beyond these similarities, it’s important to know about these factors that can influence your business credit score.
How Your Score is Measured:
Cash Flow
This is an evaluation of repayment ability. A lender will evaluate your ability to repay before they will approve your loan. Cash flow is evaluated by several components, including the following: The income a business generates versus the expenses it takes to run the business analyzed over a specific time period. For example, if a company regularly generates $10,000 per month in cash receipts, and it has $8,000 per month in cash disbursements (expenses), the lender would determine that there is $2,000 per month in surplus cash flow that could be used to repay a loan. The ratio of cash flow to debt service is known as the Debt Service Coverage Ratio. Contingent sources for repayment are additional sources of income or capital that can be used to repay a loan. These could include personal assets, savings or checking accounts, and other resources.
Capital
Typically, a company’s owner must have his or her own funds invested and at risk in the company before a financial institution will be willing to risk their own investment. Capital is an owner’s personal investment in his business. There is no fixed dollar amount or percentage that the owner must be vested in his own company before he is eligible for a business loan. However, most lenders want to see at least 25% of a company’s funding coming from the owner before they will step up.
Collateral
Real estate, machinery, equipment, inventory and/or accounts receivable are the most common business assets (collateral) that can be liquidated if a borrower fails to repay the loan. Lenders must evaluate the marketability and obsolescence of assets when determining the sustainability of this repayment source. In the case of small business loans, the owner’s personal assets (mortgage on home or pledge of other personal assets) may be required in order to secure the loan. When an owner of a small business uses his or her personal assets to secure a personal guarantee on a business loan, he/she grants the lender the right to liquidate those personal assets to satisfy any outstanding amount that is not repaid.
Conditions
This is an overall evaluation of the conditions surrounding the loan including general economic climate at the time the loan is requested and the general purpose of the loan. Economic conditions specific to the industry of the business applying for the loan as well as the overall state of the country’s economy also factor heavily into a decision to approve a loan. Clearly, if a company is in a thriving industry during a time of solid economic growth, there is more of a change that the loan will be granted than if the industry is declining and the economy is uncertain. The purpose of the loan is also an important factor. If a company plans to invest the loan into the business by acquiring assets or improving its equity, there is more of a chance of approval than if it plans to use the funds for more risky expenses such as expanding into new markets. Most financial institutions require that the borrowed funds are used solely to increase income or decrease expenses.
Character
This is the most subjective but an equally important consideration. Lenders will typically explore a business owner’s personal history for evaluating reliability and dependability. Background characteristics such as personal credit history, education, and work experience are all underlying factors in the credit decision
Interested in looking into what kind of credit may be available to your business? Explore Ion’s business lending solutions for certain loans and lines of credit. For more information, give us a call today.