When your business faces times of financial constraint. As a business person, you need to consider approaching sources of financing. Either it is from microfinance institutions, banks, and others that are available to the business industry. What could make your business not get access to these loans? What is a net 30 account, and will it help? There are many questions that business owners have since lenders consider certain factors as they check your business creditworthiness. In this article are 5 things lenders consider before extending credit to your business.
- Your repayment history
This is a priority to every lender before they extend any credit to your business. They get this report from the credit bureaus, for it has information on your credit inquiries, credit accounts, and your last history repayment. One of the main indicators that they check, is the number of times you default on payments. This is vital for a poor credit repayment record will lead you to get no credit from any lender. Therefore, it is best to pay your bills on time. When your repayment history is good, the lender will be confident that you will repay their money. Thus, increasing the chances of getting business loans from various lenders.
- The collateral you pledge as security
Available collateral is important as you apply to various institutions as it is a form of security. Lenders can sell these assets to recover their money. In case you are not able to repay the loan. Types of collateral they consider are land, real estate, and machinery. Therefore, if your business has valuable assets, it is easy for you to get loans approved quickly. Optionally, you can consider going for unsecured loans, only that you need to have a good repayment history, a high credit score, and a very stable business. Notably, in a case where the value of your collateral is depreciated. It is better to apply for a small loan that will match the collateral value.
- Your business credit score
When you have a good business credit score, the higher the chances of getting a loan from various financial institutions. Hence your business credit score is an important factor in determining the creditworthiness of your business. Plus, it is not difficult for lenders to know your business. As they can access your business credit report from the credit bureaus. Therefore, you need to be aware of what they consider while calculating your score. For instance, how often you open a new credit account, your credit utilization ratio, how fast you clear your money, among many others.
- The debt to income ratio
Are you aware of the debt to income ratio of your business? This is another thing that determines your business creditworthiness. Calculating this ratio is easy, and any business owner can do it. Take the total amount of all your monthly obligations and divide it by the income generated monthly. Plus, the lower the ratio, the better it is, and it should not exceed 36. So, when your debt to income ratio is high, you may forfeit payment. When the lenders see your ratio is high. It is a red alert to lend money to your business. So, pay your debts to ensure you lower the ratio to a minimum point.
- The financial standing of a business
Banks and other financial institutions will need to see your last year’s financial statements. Also, have your cash flow statement and income statement. In this way, the lenders will get an insight into your company’s financial position. When you have a stable business, the lenders will grant you credit since they have a surety that you will repay the debt. In comparison to businesses that have so many debts that lenders will fear to risk their money. For this reason, ensure that the business you are running is financially stable.
In conclusion, consider the above if you want lenders to extend credit to you. Plus, building a creditworthy business is a great investment for your business so that you do not miss opportunities of getting various forms of credit from time to time. Also, ensure you work on your cash flows. So that you have a strong financial statement that you can show to your lenders.