If you’ve begun to look into financing for your small business, chances are you’ve started to think about your credit. For most forms of financing, a credit check will be run as a part of your application process.
While most traditional lenders may look into your business credit, if you’re considering alternative lenders or if you’re a new business without a lengthy financial history, your personal credit will definitely be included in the evaluation process.
You understand that your personal credit is important, but below we’ll look at the history of credit checks and explore why you need a credit check to qualify for a business loan.
Where Did the Concept of Credit Checks Start?
Before the 20th century, if someone wanted a loan, there wasn’t a formal application process. However, lenders still wanted to get a sense of whether or not the prospective borrower was trustworthy, so they’d do an informal investigation into the borrower’s character. This mostly consisted of going around to local businesses and getting word-of-mouth reports from other owners in the community.
Equifax was the first company to take this process to the next level and turn this informal reporting system into an actual business. Founded in 1899 by brothers Cator and Guy Woolford, the brothers began by collecting information on the trustworthiness and fiscal responsibility of local businesses, aggregating that information, and publishing it in The Merchants Guide, which they sold.
Credit Checks for Business Loans Today
Equifax is still around, and along with TransUnion and Experian, they are the three major credit bureaus in the United States for personal credit checks. For businesses, the major credit bureaus are Dun & Bradstreet, Equifax, and Experian. Each of the bureaus generates a credit report based on a variety of factors, and your report may vary from bureau to bureau.
However, while their formulas differ slightly, each of the personal credit bureaus look at the same five general categories: payment history, accounts owed, length of credit history, new credit, and credit mix.
Why Do Lenders Do Credit Checks?
Just like lenders of the past, today’s banks and online lenders want to feel assured that they’re likely to get their money back before assisting a borrower. As a business owner, you wouldn’t work with a vendor who had a history of not delivering the product they’d promised; similarly, lenders want to work with borrowers who will be likely to pay back the loan promptly so that the lenders can generate their income through interest payments.
While there are no guarantees in life, a history of being financially responsible is generally a good indicator that a borrower will be responsible in the future, so if your credit score is strong, lenders are more likely to want to work with you.
How Your Credit Affects Your Business
If you’ve made some financial missteps in the past and have weak credit, you may have some work to do before you’re able to qualify for a loan. You may find it very difficult to qualify for the best financing options. If you fall into this category, consider alternatives to traditional loans that may still provide you with the capital you need without you having to rely on a positive credit check.
If you have strong credit (scores 700+), you’re in a strong position to apply for any type of loan, including traditional financing from a bank and SBA loans. This is good news, because banks typically offer the lowest interest rates around.
If you find your credit falls below the mark, there are still financing options available. Your options will vary based on where exactly you fall, but alternative lenders, for instance, take other factors into account.
What to Think About Beyond the Credit Check
If you’re worried that a credit check won’t show you in a favorable light, there are other figures that can allow you to make up for weak credit. If your company has been in business for a while and has strong revenue, this can give you added credibility with a lender.
While business loan requirements will vary from loan to loan, a number of them are fairly standard, and understanding where your strengths and weaknesses are in each element can help you target lenders that allow you to show off your strongest financial attributes.
Your personal credit is often a factor in financing your business, so it’s important that you have a handle on what it is and what you can do to improve it or keep it healthy. Being responsible with repayments on debt you already have, and being careful not to overextend yourself financially are the two most important things to keep your score in good shape and help give your business its greatest shot at securing the financing you need.