A credit score is more than just a number. It’s a measurement of a borrower’s creditworthiness. When applying for a business loan, the lender may check your credit score. A high credit score may increase your chances of getting approved for the loan at a low interest rate. A low credit score, on the other hand, may result in the lender rejecting your application for the loan — or approving your application but at a high interest rate.
Building Business Credit: A Crucial Step for Loan Eligibility and Rates
There are personal and business credit scores. Personal credit scores are tied to an individual’s personal finances, whereas business credit scores are tied to a business’s finances. When you open credit accounts in your own name, you’ll typically build personal credit. When you open credit accounts in your business’s name, in comparison, you’ll build business credit.
Some entrepreneurs assume that only business credit scores matter when applying for a business loan, but this isn’t necessarily true. Your personal credit score and/or your business credit scores may affect your eligibility for a business loan. Some lenders only look at personal credit scores, whereas others only look at business credit scores. If you get an unsecured loan, the lender may not consider any of your credit scores.
Factors That Affect Credit Scores
What factors affect your credit scores exactly? There are many different “types” of credit scores. One of the most popular personal credit scores is FICO. Popular business credit scores include Dun & Bradstreet, Equifax and Experian.
Each credit score uses its formula. Nonetheless, many of them share the same factors that influence their respective formula. Repayment history, for instance, is an influencing factor. If you regularly repay your debt on time, you’ll reap the rewards of higher credit scores. Credit utilization will also affect your credit scores. You should typically strive for a credit utilization of 10% to 30%, meaning that you are using 10% to 30% of your available credit at any given time. Other factors that affect credit scores include outstanding debt, delinquencies and duration of credit history.
The Importance of Credit Scores When Applying for a Business Loan
Lenders accept a risk of financial loss when lending money. If the borrower doesn’t repay the loan, they’ll have to write it off as a loss. This is why many lenders look at credit scores during the application process.
High credit scores show lenders that you regularly repay your debt. Therefore, they’ll feel more confident lending you money. Furthermore, lenders may offer you a lower interest rate on the business loan, meaning you’ll save money over the term of the loan.
This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.