Are Small Business Loans Based On Personal Credit?
When applying for a small business loan, the director(s)/business owners’ personal credit is typically evaluated in the process. This is because when a company is in its early stages, it can be difficult to assess its financial health.
Your personal credit can demonstrate how you have previously managed your finances and debt responsibly, showing that you would make a reliable borrower.
Although personal credit can be an important factor that influences whether you are accepted for a small business loan, having bad credit doesn’t mean it's impossible to secure a loan. Lenders like BEF provide more flexible lending options, evaluating your situation holistically to find a loan amount and terms that can work for you and your business.
How a Good Credit Score Can Benefit a Business Loan Application
Having a good credit score, both personal and business, shows you have good financial health, and increases your chances of being accepted for a small business loan.
A strong credit report indicates that you are a reliable, financially responsible and trustworthy borrower, which will help you secure better loan terms in several ways. You can acquire access to better interest rates, obtain higher amounts, receive favourable loan terms, have more of a choice regarding the type of loan you take out, and speed up the approval process.
Can I Get a Business Loan With a CCJ?
Having a County Court Judgment on your company’s credit file will likely hinder your chances of being accepted for a loan. Lenders will be able to see the details of the CCJ when looking at your credit file, including the outstanding amount owed - which may influence their decision on whether you’re reliable.
However, there are circumstances where lenders will consider offering you a loan even with a CCJ. If you have a CCJ from years ago which was easily resolved once your business started thriving again, lenders may excuse this when looking at your new loan application.
Alternatively, lenders may offer secured loans to borrowers who have a CCJ. These loans provide less risk to the lender as a company’s assets such as property, stock, and equipment can be put up as collateral.
What Factors Impact Eligibility For a Small Business Loan?
There are several factors that lenders will assess to determine a business’s financial health and whether it can repay its loan. Having an understanding of these factors, as a borrower, will help you to prepare accordingly and increase your chances of a loan approval with favourable terms.
Business Plan
A well-structured business plan will help the lender clearly understand the business and provide confidence that the company is well-prepared to repay its loan. A good plan should explain the company’s goals, strategy for achieving success, financial projections, target market, and competitive advantages. Covering these bases shows that the business is reliable, has growth potential, and will be low risk to lend to.
Credit Score
When lenders assess whether to accept a small business loan, a business's credit score or the owner’s credit score, can be critical factors. This is because the credit history shows a person or company’s ability to manage debt and make timely payments. Ensuring you have a high credit score is likely to indicate you are reliable and allow you to receive favourable loan terms.
Assets
The assets owned by a business are another consideration taken into account when a lender is assessing a business’s worth. These assets can be physical like property, equipment, vehicles, and stock, or intangible like intellectual property, software, and licences and permits. These items can be used as collateral against a loan to reduce the lender's risk and allow your loan to be more easily accepted.
Current Debts
A business’s existing debts will be considered by lenders when determining whether the business can afford to take on additional debt. If your company already has significant debt, you may have a bad debt-to-income ratio, which can make lenders apprehensive to grant you a loan.
Revenue
The revenue of your business is also likely to be evaluated when applying for a loan, including the average revenue growth over time. The business’s revenue trend is a strong indicator of the company’s financial health, and lenders want to see consistent growth over time. Having a stable history of revenue growth over time will make the business more appealing as a loan candidate, as it suggests a higher chance of repayment.
Business Age
The age of your business can also influence how eligible you are for a loan. Established businesses with a long trading history are often seen as less of a risk to lenders, due to having a record of performance and financial stability over a period of years.