If you’re an entrepreneur in the market for a small business loan, you already know that creditworthiness is one of the most critical factors that lenders examine when determining whether or not to lend you money.
Lenders will look for certain characteristics when deciding whether you are creditworthy, and it’s important for you to know what they are. Read on for a list of factors that lenders look at when deciding whether you are creditworthy enough for a business loan.
1. Credit History
This one seems obvious. The longer you’ve had credit, the better this reflects on you—especially if you’ve paid your bills and paid back loans in a timely fashion. If you’ve been consistent with timeliness over the years, your interest rate may even be lower than it would be for someone with poorer credit history.
Based on your business’s monthly revenue and its total expenses, lenders try to determine how much money you have left after all expenses each month; then, lenders try to figure out if your business can handle more debt. Lenders often seek a debt ratio of 40% or less — how much you earn in comparison to how much you owe each month.
3. Business Credit Cards
Lenders also examine how much available credit you have on your business’s credit card(s), and how much credit you are using. A good rule of thumb is to use no more than 30% of the available credit on your card. Avoid having your balance close to the credit limit; this reflects poorly on your handling of finances. Banks don’t like to lend to people who seem to live on the edge of financial danger.
4. Recent Credit Applications
If you’ve recently applied for many new credit cards for your business, lenders may view this as a sign of financial burdens or problems in your company. Avoid opening too many credit card accounts in general.
Lenders like knowing that you have something to fall back on if you are unable to pay back the loan. Cars, homes, antiques, artwork, and jewelry are all examples of commonly used collateral, but just keep in mind that the bank can seize these possessions if you cannot make the required loan repayments.
Need advice on how to improve your business credit score? Call 800-200-5678 and ask to speak with a Biz2Credit small business finance expert.