If your small business loan has been declined by a lender, it can often have more to do with your personal credit history rather than a perceived hole in your business plan.
While there are a number of factors which could have affected your ability to make repayments on loans or commitments, these will unlikely be considered by a lender making a decision on your business loan application. As such, there are ways and means to ensure that your expectations for credit match those from the perspective of a lender. Understanding the inextricable link between risk and approval for credit is often the inspiration to learn how to improve your credit score, and find a suitable lender
Understanding your credit report
As a credit report indicates the likelihood and capability of an individual making repayments on time and in full to lenders, it is crucial that you are familiar with yours. You are entitled to access this information, and you can check your free credit score instantly or request it in writing. The Federal Credit Reporting Act (FTC) provides a summary of your rights under the Fair Credit Reporting Act.
Personal credit scores in the US are generally worked out via an algorithm developed by FICO to calculate your credit score, which gives lenders the opportunity to assess the risk you pose to them. The scoring system assigns you a number between 300 and 850, which will determine the category you fall into.
How you are assessed
The following information on FICO scores demonstrates how lenders will assess you, according to the potential risk your application for credit may represent:
Exceptional (800 – 850): 19.9% of People
Approximately 19.9% of the population of the United States fall into the Exceptional Credit Score category. Applicants within this bracket are considered as extremely low-risk and will qualify for the best rates on credit.
Very Good (740-799): 18.2% of People
Applicants falling into this category are likely to be offered rates which are deemed above average.
Good (670-739): 21.5% of People
Just 8% of applicants deemed to have a Good Credit Score are likely to become ‘seriously delinquent’ at some point.
Fair (580-669): 20.2% of People
Applicants with a Fair Credit Score are regarded as subprime lenders.
Very Poor (300-579): 17% of People
Exceptionally high-risk, those applying for credit from this category may be required to pay upfront fees or deposits and have a high chance of having applications declined.
Poor credit may impact you now, but you can turn things around
The current economic climate makes it tough for even those with above-average personal credit scores to obtain business loans, which makes it even more difficult for those with poor credit. However, this does not mean that those deemed to be a higher-risk to lenders cannot obtain credit in the future.
There are specific types of credit available to those with lower credit ratings, although interest rates and APR’s will generally be much higher. The upside to working on your credit rating is that it will make it easier to obtain credit in the future, providing your efforts are serious and well-managed.
Business plans may need to be offset for a little while, but that is not always a bad thing.
- Pros and Cons of Financing a Business
- Comparing Loans Before Starting Your Own Business
- Minimize the Risk to Your Personal Credit When Starting a New Business
- How to Avoid Destroying Your Personal Credit While Starting a New Business
- What is the Obsession with Credit Scores?