Businesses are often built on the back of loans. Without a strong lending industry and decent interest rates, the business economy in our country would suffer tremendously. Sure, it’s true that more and more people are exploring their options and starting up businesses without capital, something that’s made easier with the ease of access to the Internet. But most will need a healthy amount of capital to really get going, and most people simply don’t have the resources to raise all that required cash independently. So they turn to banks and other types of lenders to get capital.
But it’s not just startups that need loans. In fact, a huge bulk of business loans are actually taken out by established companies. Even after a few healthy years of business, many business owners may find themselves in need of a strong cash injection, either to resolve a specific crisis or cash flow problem, or simply in order to fund a new business project or location.
So how likely is it that a business will receive a new loan? Well, it can depend entirely on their credit score. And if the credit score of your business isn’t particularly inspiring, then you may find yourself having a lot of trouble getting the loan you need.
Wait… businesses have credit scores?
You may be pretty familiar with personal credit scores by now. If you managed to get a loan in order to start your business in the first place, then it’s pretty much guaranteed you know how this works. A potential lender will review you and your records and ask themselves this question: if we give this person this amount of money, how likely will it be that they’ll pay us back? They’re basically trying to figure out how safe of a gamble you are. Because that’s precisely what a loan is to the lender; it’s a gamble. There’s always the chance that they won’t get their investment back, let alone any profit in the form of interest rates.
It basically works the same way for businesses. As you run a business, you’ll be developing a business credit profile as well as a personal one. And just like your personal credit score, several variables will be used to determine how likely it will be that your business will generate enough money to pay a lender back. They may consider your personal credit score to an extent, but they’ll focus more on the accounts and balances of the actual business.
The problem with banks
How credit scores function in the world of lending isn’t always as obvious as people think. For one thing, there isn’t a universal credit score, contrary to what seems to be popular opinion. One institution might deem you to have a slightly higher credit score than another and thus be willing to work with you, despite the fact that they’re analysing the exact same data. Potential lenders will be working with different criteria, or will place place more emphasis on one problem during risk assessment than another.
But even if you have a good credit score, banks won’t always work in the way that you’d expect them to, which is why a lot of business owners end up working with a cash flow finance company instead. An unblemished credit report may not result in you getting the loan you need because banks are often very willing to reject perfectly feasible applications using pretty weak excuses; this is often because they may lack the funding that a lot of other institutions have. Even if your requirements are fairly short-term and there’s ample evidence you’ll be able to pay them back in no time, they may have to reject you on flimsy grounds.
It’s not just strictly financial concerns that prospective lenders are going to consider. Your accounts and balances may look strong, but the lender may also attempt to predict what might happen to their money by judging elements of your business character, as well as the general outlook of the health of your particular industry – the latter may not always be in your control, but the former is usually down to you. It’s just that a lot of businesses neglect to consider this aspect of the loan application process.
Strong reputation management is vital for many aspects of your business, including the acquisition of a loan. The way that your company, or people within your company, behaves on social media may be taken into account. If your website design isn’t up to scratch, they may be considered a telltale sign of amateurism. If your products have been getting poor reviews lately, despite good sales, then this can also harm your chances. You may not think many of these things would be all that relevant. But you have to try to remember that a lot of potential lenders out there will look for pretty much any excuse to either bump up your interest rates under the guise of risk management, or simply flat-out deny you the loan. Be vigilant!
If the credit score of your business is deemed bad, then this doesn’t necessarily mean that you’re running a bad business. Perhaps you could have been a bit more strategic about certain elements of your business, but you’re certainly not doomed to never get the money you need. Again, you may simply be going to the wrong people when you’re searching for a loan. It’s been estimated that around 60-70% of businesses will go straight to a bank when they need a loan, without much consideration for other options. The success rate of this pursuit is less than 30%. You need to consider other options.
There is, of course, applying for a loan from non-banking financial company to consider. Looking for cash injections from venture capitalists is another angle. There’s also crowdfunding to consider. A lot of people think only of Kickstarter when they think of crowdfunding, and they tend to imagine projects that focus solely on entertainment. But there are loads of crowdfunding platforms out there tailored specifically for businesses. Besides, Kickstarter might be a better platform for your business than you think!