In a recent statistical study started by Finder, over 40% of entrepreneurs in America took out loans to finance their businesses in 2019. This number represented a massive drop from the previous years, and it is a clear illustration of the number of people who rely on loans to finance their businesses. Notably, no bank can give you a loan in the current climate without investigating your credit score first.
The credit score is also referred to as a credit rating, and it is merely a number that illustrates your likelihood of paying off a loan based on previous loan payments and the level of efficiency through which you repaid them. Currently, all banks are required to give you a rating based on how you serviced a loan, and this information is availed to all potential lenders upon request.
A good score increases the likelihood of your being given more debt while a negative rating keeps the lending institutions at bay. While most people know how these ratings affect their loan status, quite a number are not aware of the fact that these personal ratings can extend and even affect future business loan decisions. Therefore, why are the individual scores considered necessary in business loan decisions, and what can you do about it?
Reflection of Principals and Commitment
The process of getting a quick personal loan up to $15,000 is not easy, particularly not for businesses. Often, there are multiple requirements that must be fulfilled, the major one being attaining the minimum credit score for eligibility. In a typical instance, there are two types of businesses, new and those that have been in business for a long time. For the new, checking the personal scores of the owners is understandable since the company does not have a track record from which it can be judged. Therefore, the owners must prove their principals and commitment to payment of personal loans, since these traits will most likely be carried to their businesses.
Notably, there are three major types of businesses: Limited, sole proprietorships, and partnerships. In limited companies, the company and the owners are considered to be two separate legal entities. Therefore, most people believe that the actions of a person should not reflect on the company and vice versa.
While that may be true, most lenders argue that since the owners are the heart and soul of the business, their traits will be transferred into the business one way or the other. This is especially the case when the company is new, as lenders cannot predict what will happen. If the company is well established, the banks may be a bit lenient and consider the company’s score on its own. However, the lenders are always focused on the company operations, and any sign of trouble warrants a thorough check before they give the loans.
In the sole proprietorship and partnerships, owners run the businesses on their own. In such cases, there is no difference between the company and the owner(s), and the principals of the latter would undoubtedly be reflected in the company operations.
For instance, if you have an extremely negative credit score, which is representative of constant defaulting and evading payment, the lenders may correctly assume that your ethics are non-existent. Therefore, if you desire to take out a business loan, the lenders may be skeptical since there is a possibility that you would not honor that loan, either. The reasoning is that a business cannot make decisions by itself. Since you are the decision-maker, there is no proof that you would make the right choices.
Reflection of your Money Management Skills
Whenever a lending institution gives you a personal loan, they expect prompt repayments. In some cases, lenders may even ask you the reason why you are taking out a loan and give preference to the people who are redirecting it into the business. In the case you fail to repay and end up with a bad rating, it is an illustration that your money management skills are weak.
The lenders will have the same notion when you apply for a business loan, and they may be convinced that bad management will be extended to the company, ultimately resulting in its failure. With that notion, no lending institution would be willing to give you a loan.
What to Do?
If you are a businessperson or intend to be one in the future, there is a need to ensure that your credit score is good. Many lenders will accept or deny your business loan based on your personal rating. In case your loan is denied, your business growth will undoubtedly be affected. To avoid this:
- Always ensure that your loans are repaid on time. Payment history is one of the criteria used to determine your rate. Late payments decrease your score, which increases the probability of a bad rating. As much as possible, aim to make timely payments.
- Keeping the credit balances under control. Credit cards are financial tools that have resulted in the negative listing of thousands of people. To avoid falling into this category, you must always aim to keep the balances under control. Live within your means, and avoid unnecessary expenditures. The less the debt, the easier it is to pay off.
- Avoid unnecessary loans. Many people find themselves in debts that they have a hard time paying due to not having a clear plan. For instance, if you take a loan to buy an expensive item without an idea of how you will pay it back, the result is the default and a negative listing, which you could have avoided. Be wise.
A person’s credit score is undoubtedly one of the most telling pieces of information about them, particularly when it comes to virtue, principals, and the commitment to debt repayment. Currently, there is a surge of new businesses, as people attempt to establish themselves. Many people turn to loans to obtain capital for the businesses, and the lenders are very particular about credit scores. Personal scores are particularly considered to be useful in the partnership and sole proprietorship types of businesses since it would be difficult to separate the owners from their companies.
The scores are also applicable in limited liability companies, mainly when they are new, and lenders need to know the credit-worthiness of the management team. When your score is good, not only is it an assurance that you are ethical and have a commitment to the repayments of debts, but it is a sign of proper money management skills. With such admirable characteristics, lenders are confident about giving you a loan, which will push you further in your career. Getting a positive score is quite easy, as all you have to do is avoid unnecessary debts, repay all your debts on time, and ensure that your credit card limits are manageable. Credit scores are undoubtedly very sensitive, and your maintaining a positive rating is good for you in the long run, especially if you wish to begin a business.