Understanding Credit: Access to Loans
When you are first starting out as a business owner, your business credit doesn’t have a proven track record, so it is closely tied to your personal credit. As your business progresses, your business can also have credit. Both personal and business credit is important when thinking about a traditional loan.
Banks often refer to the “5 Cs of Credit” when measuring a company’s or individual’s creditworthiness. Here’s what they are and how they can impact your efforts to get a loan:
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This is a biggie. Your credit report and credit score play a big role in helping banks determine if you are a good candidate for a loan.
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Lenders want to be sure you can repay any loan they offer. They measure this by comparing your current debts to your income to see if there is room (capacity) to make payments on a new loan.
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This is something the borrower offers the lender that can be repossessed if the borrower doesn’t repay the loan. Auto and home loans work this way – if you miss too many payments the bank can take your car or home to recover their losses.
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Capital is how much of your own funds you are willing to invest. For a home, it would be the down payment. For a business, lenders look more favorably on borrowers who can contribute some capital toward their business.
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Lenders consider what the loan will be used for, and terms and conditions like interest rate and length of the loan.
Cleaning up your personal credit is an important step if you are trying to acquire financing for a new business venture, and it is not always a quick process. An SBDC Advisor can help you figure out what your first steps should be.
Truist, a small business champion and sponsor of the RRSBDC, joined us recently to talk about the 5 C’s and what impacts a loan decision.
If you’re ready to start looking for lending options, we can help you find the right fit, and prepare a package to take for approval. We secured over $16 million in capital for small businesses in our region in 2020!