Time for a Bank Loan? What Lenders Are Looking For in Small-Business Owners.
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During the recession, credit scores took a pummeling and left many small-business owners doubting whether their business credit was good enough to get financing. But the truth is many lenders don't rely on business credit scores to determine if a candidate is a good fit for a small-business loan.
Business credit files are established by vendors and lenders reporting on a business' payment behaviors. Business owners establish good credit by:
- responsibly managing their vendor invoices
- and keeping payments up to date.
Companies in certain industries, such as construction and manufacturing, tend to use many vendors who report to business credit bureaus. This activity helps businesses in these industries establish a thick credit file.
On the other hand, industries such as day care or consulting use relatively few vendors. These types of business are more likely to have a less robust credit history just because of the nature of their business. If an entrepreneur relied on personal assets or personal debt to get his or her business started, his or her company would also have a thin credit history.
If you have a weak business credit file (or none at all), this may not matter as much as you’d think when it comes to financing. Lenders today look at much more than business credit.
Instead of trying to repair your business credit, take the time to clean up your personal credit. Take steps to routinely monitor, evaluate and protect it just like a business asset. More and more lenders ask for personal guarantees on loans, especially when a business has no borrowing history. So for small-business owners, personal credit often becomes more important than business credit in the long run.