Transforming your ideas into a full-fledged, running business can be quite intimidating, especially if you are a young businessman with no prior experience in the field. It is almost impossible to know all sides of the coin before you have it in your palm; you realize the problems only when you have started your venture. One such problem is maintaining a perfect credit score. Besides assuming the significance of your company, it works as a messiah when you are borrowing capital for your business. Ninety percent of the lenders judge business loan applications on the criteria of the respective company and its owner’s credit card score. Before we delve into the aspects of credit scores, let us first understand how it impacts companies’ main source of financing and their long term business loans for bad credit.
What is a Credit Score?
In other words, a credit score is a summary of a company or an individual’s repayment of loans borrowed from financial institutions such as banks. It is generated by a credit rating agency i.e. a special institute operating with the sole purpose of producing credit scores of individuals and organizations. The credit rating ranges between three hundred to nine hundred. The minimum score required to secure business loans is 750. On the other hand with a credit score of 625 you can even get a short-term solution like purchase order financing.
Credit rating has always been one of the essential criteria for most lenders. A bad credit score i.e. below 750 can put you in hot waters. It ruins the chances of approval, and even if you manage to secure the loan, you would be put on defaulter applicants’ category, which results in higher interest rates or small amounts of loans. Whereas a good credit score earns you bargain on interest rates and guarantees your desired amount of loan. Hence, it is called the personal credit score and for companies, a company credit report or CCR. This is an entire report consisting of a record of your past repayments and purchases on a credit card.
Impacts of Business Loans on Credit Score
A loan is a form of money that one party called lender gives to another party called the borrower on the condition that it be paid on time with desired interest. When a company applies for a business loan, it requires signing a contract, giving the word that the repayment shall be made within the agreed time frame. In a broader sense, it is a parameter of trust that you will repay the borrowed cash on time. Good credit will trick the lenders into believing you are punctual with your payments, even if you are not anywhere near punctuality.
Now, if we reverse the positions of the loan and credit score, you can understand how the loan affects credit rating. It is nothing but a numeric snapshot of your repayment history.
How Loan Applications Affect the Credit Ratings
Your credit score enters a transition state, either good or bad, the moment you apply for a business loan. The reason is that about 10% of your credit card score is a result of the number of credit-based applications you have made. Every time you apply for credit, the lender inquiries about your entire credit report. These inquiries show how badly you need a loan. If you are shopping for a mortgage loan, the various loan inquiries do not affect your credit score much. Hence, it would work in your favor if you lessen the rate of shopping as it will not negatively impact your credit score.
Timely Repayment Fixes Bad Credit Scores
The loan is an excellent way to improve bad credit scores. It provides a chance to make timely payments and renew your credit score as if it was never damaged before. The key achieves this is to repay the lenders at the agreed time of the month. Miss a single payment and you will have to start new. Because missing one payment can lead to a series of late repayments or more serious consequences like repossession of your assets such as car or property.
Loan payments have a significant impact on the credit rating since the repayment history makes 35% of the total credit rating. Scheduled repayments not only make your credit score pretty but also make you a favorite borrower in the eyes of the lenders.
Borrow the Amount You Need – No More, No Less
Borrowing more than the actual required amount is one of the leading causes of bad credit scores. Because, when you ask for bigger amounts of money, it becomes impossible to repay them on time, resulting in damaged credit scores.
Besides, the total balance of the loan has a huge impact on your credit. You earn credit points as you make your payments. Make sure you keep the gap between the original loan amount and the present loan balance to ensure a good credit score.
The Loan-to-Income Ratio and Your Loan
The total amount of loan you apply for creates your debt-to-income ratio. In debt-to-income ratio, the lenders measure how much of the income do you spend on the loan repayments. While it is not a part of the credit card rating, most lenders take into consideration the income factor to assess your repayment ability. Some lenders have the debt-to-payment ratios that they consider to be ‘perfect’. Big loans do not directly affect your credit rating, but indirectly they increase your debt-to-income ratio resulting in rejection of your business loan application.
Know Your Credit Card History before the Lenders
Call the credit agency before applying for a loan, and receive a free print of your credit report. This will help in evaluating the study and checking it for mistakes and poor ratings. Furthermore, if you find any misleading or incorrect information, the credit agencies will check it and correct it. Because if you want to prevent rejection, keep your report error-free so the lender may not produce objection.
A safer way to get rid of the errors in your report is to stop contacting credit reporting agencies, and go to the account holder you have a dispute with, for example, a bank or a credit card company.
Final Word
A bad personal credit score is fine, but if your business’s rating is blemished, it would become really hard to manage the finances. Since most amateur companies rely on different business loans to fulfill the companies’ finances, it has become more important than ever to ensure a brilliant credit score. Because credit score plays the key part in your application’s approval. Almost all business loans are granted by financial institutions instead of private lenders. These financial institutions do not take the risk with their borrowers and only choose the best to grant money.
But, once the credit score gets damaged, there are only a few effective ways to restore it. Business loans might be your best shot at renewing your credit card rating. Since it defines your past repayments – whether you have paid back on time or not – you can make up for your past mistakes by seeking a loan and making timely payments.