While lending loans to small businesses, lenders look at various factors. They have to make sure that the loan offered will be paid back on time and that the company or business that they issue loan to is credit worthy. If the borrower fails to pay, then the lenders will have to undergo lot of financial obligations and take lot of measures to get the payment. Hence they study the history of the borrower in detail before extending loan and calculate the credit worth of the business.
It is a pre-defined notion among many that credit score is the best indicator of a company’s credit worth. But in some cases it might prove wrong. Let us look at few instances where credit score cannot be taken as an indicator.
Meant for personal bills, not for business requirements:
Experts say that Credit score is used to pay primarily house hold expenses and not business obligations. To depend completely on credit scores while extending loan is not always justified. Borrowers treat credit in one way and lenders see it in a different way. Some loan applications are turned down because of credit scores entered in application forms. Though it is easy for lenders to extend loan based on that, it is also equally complicated because it makes lenders ignore other aspects of security which otherwise would potentially help them understand whether a borrower could clear his/her loan on time. It gives a wrong approach on dealing with the current financial scenario of the borrowers. Evidently not every time they stand by their promises.
Requirement to count on other metrics:
To understand the exact financial repaying capacity of a business it is better to take other factors also in to consideration. Though credit score can be a good indicator, lenders may sometimes lose a potential customer just because of low credit score. Other factors that we are talking about may include the turnover of the business, annual profits, etc. Apart from this lenders may also consider non-financial aspects like the goodwill of the business and its market position.
Moreover, sometimes business credit application is turned down because of low business credit scores. In these kinds of circumstances, businesses depend on personal credit scores which is again low because of repeated use of personal credit for business. The actual reason for having a low personal credit score is because of utilising it for repaying business loan and not failure in persona credit. While there is already low business credit score, this cycle gets repeated every month resulting in low personal credit score also. This makes the situation of small business owners even worse in getting a credit. So if the lenders find a business worthy enough to lend loan considering other aspects, they can gain potential customers.
Deil D Pecci is a writer and blogger based in Chicago who covers topics on personal finance and entrepreneurship. Deil D Pecci has made Chicago her home along with his wife and children.