Banks look carefully at borrowers, if you are a business owner with poor personal credit, you may be thinking that corporate credit is simply unavailable to you.
This is not true! In fact, the process of establishing good business credit may even help you improve your personal credit because you will have a better understanding of how credit lending works.
In the credit world, there is what’s known as the “Four C’s” of Credit—four things banks look at to determine your creditworthiness. These “Four C’s” apply to individuals and to businesses, and they are:
Character is that when a bank judges your business’s character, it is looking at your size include:
– Years in business
– Number of employees
– Stock performance
You will need at least 4 trade references to obtain a business FICO score, factors that will affect your credit score include:
– Late payments
– Delinquent accounts
– Available credit
– Total debt
This is why it is very important that as a business you have a physical address, a business phone, answered professionally during business hours, and a business license (if your state requires one).
Capacity is about your business that assesses the ability to pay bills. A bank considers capacity including examining past credit histories as well as cash flows and the type of previous dept secured or unsecured. Therefore it is vital that as a business owner you have been paying all your credit bills on time. A late payment on a credit bill is a mark against your business that is not easily removed.
Capital refers to the capital assets of the business. Capital assets might includes machinery and equipment for a manufacturing company, as well as product inventory, or restaurant fixture. Bank consider capital, but with some hesitation, because if your business folds, they are left with assets that have depreciated and they must find someplace to sell these assets, at liquidation value. You can see why, to a bank, cash is the best asset.
Collateral is cash and assets a business owner pledges to secure a loan. In addition to having good credit, a proven ability to make money, and business assets, bank will often require an owner to pledge his or her own personal assets as security for the loan.. Banks require collateral because they want the business owner to suffer if the business fails. If an owner didn’t have to put up any personal assets, he or she might just walk away from the business failure and let the bank take what it can from the assets. Having collateral at risk makes the business owner more likely to work to keep the business going, as banks reason it.
As you can see, the old saying that “banks only loan money to people who don’t need it” is basically true. In order to get a business load, you will need to have an excellent credit rating be able to prove your business will generate revenue to pay the bank loan.
Show that the business assets have value in case they need to be sold to pay off the bank, and pledge your own assets in case the business failure.