By Marco Carbajo, Guest Blogger
When it comes to business credit, there’s no standard scoring model for assessing risk. Lenders, suppliers, banks, leasing companies, businesses, and finance companies all use different reports and scoring models depending on which business credit reporting agency they subscribe to.
Your company’s business credit report shows banks, lenders, suppliers, vendors, and other businesses how your company handles its financial obligations. Here are five factors that impact your business credit.
Lenders have to believe that a business and its owners are reliable and can be depended on to repay on a loan, business line of credit, etc. The personal credit reports of an owner(s) and business credit reports of the company are the primary tools used to assess creditworthiness.
In addition, trade references will most likely be required on a business credit application as part of the credit decision making process. Typically, a credit application for a business will ask for three trade references.
This is an evaluation of your company’s ability to repay on a loan or business line of credit. This includes positive cash flow, bank history, payment history, and additional cash sources and reserves. The best way to show your credit capacity is with positive cash flow, a favorable bank rating, and positive payment history with other businesses.
When it comes to payment history, banks, lenders, and suppliers want to know how long an account has been opened, the credit limit extended, and how many times the account has been paid late.
One of the factors bankers use during a business loan evaluation is the amount of funds the owner has invested in the business. Most likely there will be a more favorable consideration for a business loan if there is a “reasonable” amount invested in the business from the owner.
How much skin you have in the game is very important and can make the difference between an approval and denial. Banks examine the business’ debt-to-equity ratio to understand how much money you’re asking for compared to how much money you have already invested in your business. The smaller the ratio the better.
Commercial real estate, heavy machinery, business equipment, inventory, stocks and bonds, and other expensive business assets that can be sold if a business fails to repay the loan are considered collateral.
Once a bank accepts your collateral, it will determine the loan-to-value ratio of the collateral based upon the nature of the asset. Each lender considers the loan-to-value ratio differently, so you’ll need to ask your lender how they intend to set that value.
Most traditional banks require collateral with a business loan, but there are other lenders who do not require any collateral to approve a loan.
Be prepared to prove that the conditions are right for your business. Make sure there is market potential, an industry, positioning, competitiveness, and experience to back up your plan.
When applying for business credit, it’s important to establish personal and banking relationships. It’s always advantageous to apply for funding with a bank you already have an established relationship with. The less risk you pose to a bank or lender, the greater your chance of securing funding at favorable interest rates.