Just like with your personal credit, the goal is to have good business credit. To achieve this, you have to understand the factors that contribute to your business credit and monitor them. The business credit reports traditional lending institutions rely on are based on financial payment history, trade payment history, business demographics, public records, legal filing, and more. While a good business credit history is important, it isn’t always the deciding factor when it comes to small business lending. Here are some reasons why.
Business Credit is Complicated
Building credit, personal or business, takes time but business credit can be a bit more difficult. With personal credit, much of the financial history is required to be reported including credit cards, mortgages, auto loans, and utility bills. This creates a clear picture of a person’s financial history. This isn’t always true with business credit, as lenders and credit bureaus aren’t required to report activity. A business could be open for years and still have very little history.
Even if these agencies were required to report payment performance back to the main credit bureaus, it would still take 10 to 20 years to build a thorough credit report for a lender to review. With many small businesses failing in less than five years, most never establish enough credit to warrant a report.
Personal Credit vs Business Credit
When small business lenders are reviewing applications, they often pull the business owner’s personal credit rather than their business credit history. This may seem surprising but why waste time reviewing a credit history that may be inaccurate or incomplete. A business owner’s personal credit history will often be more complete and cover a longer period of time compared to their business credit. From the lender’s perspective, it doesn’t make sense to waste time and money pulling data on something that’s incomplete or inaccurate.
However, the small business owner’s personal credit profile likely has many years of payment history to review. In fact, according to a report developed by Babson College, fifty-one percent of small business owners are over 50 years old. It stands to reason that their personal credit history will probably be much more extensive and informative.
Financial Health of Your Business
With small business lending, great effort is exerted by lenders when analyzing the final health of your business. Your cash flow and the transaction history of the business’s bank account are the primary factors that are scrutinized. Lenders can learn a lot about your business history by reviewing daily balances and transaction details. They also consider your business’s potential for growth. Your personal credit history, your business’s financial health and its trajectory for growth will give lenders a much better idea of the creditworthiness of your business. This is not to say your business credit isn’t important – it is. But when it comes to small business lending, other factors may be equally or even more important.
Small Business Lending
At CFG Merchant Solutions, we can help your business grow faster with a variety of small business funding options. We will guide you in choosing the perfect solution for your individual business needs. Our team brings to the table more than 60 years of institutional investment banking experience in the credit, commercial finance, and capital markets.
We are a privately owned and operated specialty finance and alternative funding platform. We focus on providing capital access to small and mid-sized businesses (Merchants) in the U.S. that have historically been underserved by traditional financial institutions and may have experienced challenges obtaining timely financing. Contact us or apply online today!