5 Factors Lenders Look for in A Creditworthy Business

Financial constraints are sometimes inevitable in business as you try to develop and grow. When you undergo such times, as a business person, it is best to approach lenders and other sources of financing for help. Either it is a microfinance institution, banks, and others that are available to offer credit to businesses that need it.

Unfortunately, not all businesses can have easy access to loans, as lenders have some factors that they consider before they offer you credit. Is your business in a position to meet all the requirements that financial institutions need before they give lines of credit? As a business owner, are you familiar with the factors that will determine your creditworthiness? Below are 5 Factors that lenders look for in a creditworthy business. 

Current business credit score 

One of the main factors that lenders always check is the business credit score. When you have a good business credit score, the better the chances for you getting a loan for your business in the many financial institutions, these institutions can access this information from your business credit report that has various information that the credit bureaus use to calculate either your personal or business score.

Hence, it is essential to have a creditworthy business if you need creditors considering you when you seek credit. Also, to boost your business credit score, try to reach companies that help build business credit. Through this, you can get a high score putting you at a better chance to have your loans approved. Also, you will learn about various things that will help you meet the desired business credit score. 

2.Available collateral 

As you apply for loans from various institutions, having collateral to act like your security is a must. Hence, this is another factor that lenders will consider as they check if your business is creditworthy. Also, the collateral is an asset that the creditors will sell if the need to recover their money arises when you have defaulted in paying your loan. Some of these assets are land, machinery, and real estate.

Thus, if your business has such valuable assets, you can have your loans approved with ease. Fortunately, if you have a very stable business with a high credit score, you can apply for unsecured loans even with no available collateral.

Still, you will need to have a good repayment history. So with a valuable piece of collateral, holding other factors constant, you can get a considerable amount of money for your loan request for the value of your security asset are high. If not, it is best to apply for a small loan if your collateral value is depreciating. 

3. Repayment history of your credit

Another crucial factor that lenders consider before offering any credit to your business is your credit repayment history. This gauges your business creditworthiness, and it is easy for lenders to access this information as they can get your credit report from the credit bureaus.

Not only do the credit reports contain your repayment histories, but your credit inquiries your business makes and your credit accounts as well. All of which is vital information to the lenders.

However, the critical indicators are if you have a history of bankruptcy and if you are a defaulter in most payments. Hence, with a poor record of credit repayment history, most lenders will not give you any credit. Thus, every business should pay their bills on time, for with a good credit repayment history, the lenders have a belief you will pay their money on time.

4. Financial standing of your business

Financial institutions like banks and others tend to demand businesses and other financial institutions with a financial statement of the previous year, previous months’ interim financial statement, and balance sheet. Also, it would help if you had financial statements like the cash flow and income statements.

These statements will not only show your business financial standing but will give more insight into where your business is in terms of finances. Hence, it is easy for lenders to grant your business money if your business is very stable, as it is a surety that your business can repay debts. Plus, if you have a lot of debt, no lender would want to risk their money on your business.

So, how do you go about ensuring you have a very stable business financially? Some reduce cash outflow in ways not limited but including leasing property, reducing the number of employees, buying used equipment, among others. By doing this, you cut unnecessary costs for business as you have reduced expenses. 

5.The debt to income ratio

Lastly, your debt to income ratio is as substantial as the other four factors above in examining if your business is worth the credit it should receive. If you are a business owner, you should be able to calculate your debt to income ratio of your business.

Take the total of all your monthly obligations and divide them by the total income your business generates monthly. Most importantly, it should not be more than 36. So, a very high debt to income ratio means you are most likely to forfeit payment.

Therefore, lenders consider this a red alert and would not lend money to your business. To lower this ratio, as a business owner, ensure you pay all the debts, and lenders can consider giving you loans often. Plus, as you clear your debts, find a way to improve your cash inflow to have good financial statements.

To conclude, by considering the above factors, lenders can determine whether your business is creditworthy or not. Hence it is essential to invest in building a creditworthy business.

This will include improving your business credit score, making all your credit repayments on time, have a good repayment history that has a good reputation. When you have this sort out, it becomes easier for you to access credit from different lenders that will help to grow your business. 

Joe Calvin
Joe Calvin is a Blogger and an SEO professional. Co-founder of Bigmixseo, I have 2 years of experience in SEO & 1 year of Successful blogging @ pantheonuk.org. I have a passion for SEO & Blogging, Affiliate marketing, & to invest in high trading stocks. " Sucess is the ability to go from one failure to another with no loss of Enthusiasm."