When you are running a small business, chances are it is centred on you. In this case, when you apply for a business loan, the lender will look at your credit score apart from your company’s ability to service the debt before approving the the loan.
Most small businesses or start-ups are proprietorships or partnerships. In these cases, there is no separation between the business and the owner or owners. So, apart from the business plan, your credit history will be scrutinized by the lender when deciding on whether or not to sanction the business loan. In many cases, the creditworthiness of the owner also determines the Business Loan Interest Rate charged by the lender. It is therefore wise to check your credit rating before you apply for a business loan and prepare yourself to answer any questions that a lender may have regarding your credit history.
When Does Your Personal Credit-Worthiness Play A Part In Getting Your Business Loan Sanctioned?
Usually, any decision by the lender on extending a loan for business will be based on the income and profitability of the business. In cases where the business is new or has no previous loan repayment record, the lender will take into consideration the future income of the business. However, in order to ensure that the business loan can be repaid, the lender will also analyse the income and the credit record of the business owner.
How Does This Work?
The lender will calculate your Debt to Income Ratio [DTI] to ensure that the total debt is within set limits. Typically, a total repayment load of about 35% of your income is ideal, while repayment above 50% is considered dangerous. Mind you, this debt includes credit card debt that the business and the business owner are presently servicing. Any late payments, whether on existing loans or on credit cards, will be carefully examined to understand the reason behind the lagging payments. This will start to matter when payments are missed over a period of time, and one late payment will not affect the credit score.
When Does Your Personal Credit Not Come Into Play?
There may be cases where the business entity may have taken loans in the past; in these cases, the previous repayment record of the business will take precedence over the credit record of the business owner. Apart from the ability to repay, the lender needs to be assured that the loan applicant has a record of repaying loan EMIs regularly.
What Should You Watch Out For?
Issues such as missed payments or frequent late payments are bound to have an adverse effect on the credit record of the business owner and will hamper the ability of the new business to secure a loan. After all, the lender needs to be assured that the owner will ensure that the loan is serviced promptly and efficiently.
Any new business rests solely on the shoulders of the business owner and therefore the lender deems the responsibility of repayment of the EMI of small and medium sized enterprises on the business owner. After all, you are the one who powers your business and ensures that it functions effectively, irrespective of the high potential of the business itself. So before you go about taking a business loan, study your credit score. If you think it needs to be improved, work to pay off any remaining debt and apply for a business loan only once your credit score is up to the mark.
A business loan can be the answer you’re looking for when it comes to making your small or medium-sized business climb the next rung to success. Make sure your business loan is customised for you and allows you flexible repayment, apart from other conveniences. Consider a Business Loan Bajaj Finserv, which offers affordable financing along with easy online application and speedy approval. It also has innovative facilities like a Flexi loan and Line of Credit to serve your business better.