Small Business Creditworthiness


One of the most important aspects of receiving funding for your small business is demonstrating your creditworthiness to lenders. Here is some information that will help you determine how to demonstrate and improve your creditworthiness.One of the most important aspects of receiving funding for your small business is demonstrating your creditworthiness to lenders. Here is some information that will help you determine how to demonstrate and improve your creditworthiness.

You should also be aware of the fact that lenders look for the “5 Cs” when determining creditworthiness. These are:

Capacity

This takes into account the various factors that indicate the ability to repay the loan.

Collateral

This factor provides security to the lender either through assets like property or by having another party co-sign the loan.

Capital

To satisfy this “C,” you must demonstrate that you have made a substantial investment in your business.

Conditions

This can include the current economic conditions of the area where the business is located or the current ability of the financial institution to give out loans. It can also include the conditions of the loan itself, such as the purpose for which the funds will be used.

Character

This is a partially subjective judgment made by the lender, which is why it is so important to build a good relationship with a local financial institution. With a small financial institution, you are more likely to work closely with the person who makes the loan decisions and to form a relationship over many years.

“In the opinion of the bank, the first ‘C,’ capacity, may be the most important,” states Business Finance Expert for About.com Rosemary Peavler. “In your loan application, you must discuss exactly how and when you intend to repay the loan. Not only do you need to state your revenues and expenses, but you also need to indicate the amount of your cash flows and the timing of your cash flows with regard to repayment. … Don’t forget to indicate every possible source of repayment at your disposal in your application.”

When determining your capacity, lenders also look closely at your credit history. If your credit is less than ideal, there are several things you can do to improve it.

As Marco Carbajo stated in February,

“According to Credit Karma, more than 75 percent of Americans have a credit score below 700. If you’re one of the many who have a credit score below 700, there’s no time like today to take the steps needed that could have a major impact on your personal and business creditworthiness,” according to a February blog article written by Marco Carbajo, U.S. Small Business Administration guest blogger.

One of the most important measures to take if you want to improve your credit history and, in turn, your creditworthiness, is to establish a record of good payment history. This helps you maintain good relationships with your suppliers and business partners and improves your purchasing power.

“Payment history accounts for 35 percent of your FICO® scores and is a contributing factor in the makeup of your business credit ratings,” according to Carbajo.

In addition to staying on top of your bills, you should make sure that all of your business finances are kept separate from your personal finances. Opening separate business accounts at a financial institution is essential, and you should always pay your business bills from those accounts.

With these steps, you should be able to keep your business creditworthy. And as always, the best way to determine the financial planning for the specific needs of your small business is by talking to your financial institution or adviser.

 

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