Boost Your Credit Score for Your Business
Lending institutions want to lend money because it’s the way they make money. However, they only want to lend money to a borrower who is able to repay the loan on time and in full.
When lending financing over a certain limit to small businesses, lenders customarily analyze the worthiness of the borrower by using the Five C’s: capacity, capital collateral, conditions, and character. Each of these criteria helps the lender to determine the overall risk of the loan. While each of the C’s is evaluated, none of them on their own will prevent or ensure access to financing. There is no automatic formula or guaranteed percentages that are used with the Five C’s. They are only a variety of factors that lenders evaluate to determine how much of a risk the potential borrower is for the financial institution.
Note: When lending small amounts of money under $50,000 (small is a relative term to each lender) typically eligibility depends solely on personal and business credit scores. A credit analysis is not usually performed. Depending on the personal and business credit scores, they either will or will not approve the loan.
Understanding Credit Analysis
To determine if you will be able to establish business credit, consider each of the following C’s to see how you would look to a potential lender:
- Capacity – This is an analysis to monitor your ability to pay the loan back. The financial institution wants to know how you will repay the funds before it will approve your loan. Capacity is calculated by various components. Some of them are:
- Cash flow is defined as the difference between the generated businesses income and the payment of expenses within a particular period. As an illustration- if the credit of a specific agency of a month is $10,000 and the expenses are $8,000 a month, then the lender figures out that he has $2,000 in the cash flow that can be utilized to repay the loan. If a company has the same amount of expenses as income, that would mean the cash flow would be zero, and The lender may have a strong reason to get worried about how the company formulates a plan to pay the debt back. In such circumstances, you can consult us to know how to raise credit score and get a favorable way to increase the credit of your business.
- Payment history refers the well-timed payments that were paid on the previous loans. In the past, it was more difficult for commercial institutions to determine whether a small company had a good payment history. However, today there are companies that evaluate commercial credit ratings (such as Dun & Bradstreet) that are able to provide this kind of history to lenders.
- Contingent sources for repayment are the supplementary sources of income that can be best employed to repay the debt. These may include- personal assets, savings or checking accounts, and other riches.
Ultimately, capacity is the main requirement for lending and business credit. The ability to receive regular payments generated by a company’s cash flow is the easiest way a financial institution can be repaid.
- Capital —
Usually, a company owner must have invested the funds in his own company so that at the time of financial crisis, the financial institutions feel free to invest in his organization. Capital is valued as a personal investment that is invested in his own firm, which could be dropped at the crucial times. The best thing is that the amount or percentage is not fixed that an owner has to vest in his own company, before he becomes eligible to pay a business loan. But, still, several lenders want at least 25% to be invested in the company, before its evolution in the market.
- Collateral — Heavy machinery, stocks and bonds, and other expensive business Assets can be sold without putting much efforts. But, if a debtor won’t pay the loan back, with such massive assets, it is expressed as collateral. Since small items such as computers and office furniture are not typically considered collateral, in the case of most small business loans, the owner’s personal assets (such as his home or automobile) are required in order for the loan to be approved. When an owner of a small business uses his personal assets as a guarantee on a business loan, that means that the lender can sell those personal items to fulfill any degree of amount that is not repaid.
- Conditions —
This parameter includes the comprehensive assessment of the loan conditions, including the general economic circumstance, the loan has been requested; and its general objective. Among the two, the economic conditions that are required to approve a loan, may refer to as- the specific industry of the business and the entire status of the country’s economy. And, it is quite obvious that the growing company will get the more preference rather than an agency that is declining. Such companies words be like- how to boost my credit score or how can tradelines boost my credit? You can grab a favorable option among these two that suits you best to increase the credit score and come to us. We will get you a good way. Plus, the purpose of the loan also plays the vital role. If an agency decides to invest into a business by procuring the assets or enhancing its equity, the loan will be approved fast. While, if it intends to make use of the funds for challenging expenses, like expanding into the market, then the chances of approval may decline. On the whole, most of the financial bodies want their loan to be used to escalate the income or minimize the expenses.
- Character —
This is a highly subjective evaluation of a business owner’s personal history. The loan company has to trust and believe that a business owner is a trustworthy person who will certainly repay the debt. In the words of a business owner- “If they want, they can check my business and then grant me a good business credit for my business.” Background attributes, like education, work experience, and credit history are also the factors in this business credit analysis.
Note: When applying for a small business loan, don’t forget the importance of personal relationships. Apply for a loan at a bank where you already have a positive business relationship. Also, make an attempt to meet with the person who will be evaluating your application, such as a bank’s lending officer, rather than the teller who handles your day-to-day banking transactions.