Are you having trouble paying off your credit card? Is your line of credit in the red? If so, it’s important to know that your personal finances could be affecting your SME’s ability to secure financing. To understand how, you need to know what criteria financial institutions use to decide if a business is credit-worthy.
How is your financing application assessed?
When studying an application, your financial institution will focus on two things:
- Assessing the application as objectively as possible.
- Verifying you’re able to repay the loan within the agreed timeframe.
In order to do so, banks rely on statistical models built on large amounts of data about borrower behaviour.
By applying these models to your own borrowing and repayment habits, your financial institution is able to determine whether or not you’re a reliable borrower.
How does your personal credit history affect your business’s financing?
If you’re applying for a loan to finance a startup or finance a business project, your financial institution may ask you to guarantee it.
A guarantee is a contract whereby you personally agree to reimburse a loan if your company fails to do so.
If you have a poor personal credit score, banks may:
- Refuse to lend your business money.
- Require additional conditions (for example, a larger down payment or other collateral).
- Offer less favourable rates.
On the other hand, a good credit score will give you better borrowing conditions and even a lower interest rate.
It’s important to keep in mind that your personal credit history is not the only criterion that lenders consider. Your financial institution may refuse to finance your SME or add certain conditions even if your credit history is spotless.
How can you maintain a good credit history?
Here are five tips for rebuilding your credit score before applying for a loan:
- Limit the number of financing or credit applications you make. Frequent requests may suggest that you’re experiencing financial problems or that you’re having trouble repaying your debts – a sign it may be time to consolidate them.
- Do you have a personal line of credit? Be sure to use it wisely. A line of credit is intended to serve as a temporary source of funds when you need it. If your balance stays negative and you’re not making regular payments, credit agencies will see this as a red flag. It’s best to turn your line of credit into a term loan.
- Don’t use your credit cards or personal loans to finance your startup. It’s a bad way to use your personal credit, and it makes your business accounting more complicated.
- Needless to say, avoid overdrafts and NSF cheques.
- Even if you manage your finances responsibly, your credit report may contain errors. Contact a credit agency such as Equifax to check it. If you notice any errors, have them corrected as soon as possible.
Every financing application is different. That’s why it’s best to talk to an SME expert at National Bank, who will answer your questions and help you find the best financing solution for your needs.