As the US economy recovers from the recession, investors have started snooping around and, more and more entrepreneurs are diving headfirst into the world of startups. According to the latest MoneyTree report from PwC, a total of $48.3 billion has been invested in 4,356 deals last year. Despite, there are many startups they failed to secure a chunk of the pie but still require a substantial amount of capital, which most of entrepreneurs from such startups don’t have readily available, many are resorting to small business loans.
This type of funding can be tremendously helpful for those working on a limited budget. Moreover, as long as you’re responsible with how you handle the loan—such as making payments on time—they can be quite reasonable. Unfortunately though, a lot of people have incurred credit card debt at some point in their lives which, of course, has a negative effect on their credit scores.
Yes, credit scores are factored into a lending institution’s decision on whether or not you will be getting a small business loan.
How does your credit score affect your ability to get a small business loan?
One thing they certainly don’t teach you about in school is your credit score. Unless you are taking business classes, there is a pretty good chance that once you get out of college you won’t have the slightest idea about what your credit score is, or how it plays into your life. This is why loan and credit card companies target this demographic so heavily, praying on what they perceive as ignorance. Sadly for many of us, we found out all too late the significance of our credit scores.
This is especially true if you are trying to get a small business loan or merchant cash advance unfortunately. Most lending institutions, ranging from hometown banks to nationwide lenders, abide by these standards.
In a nutshell, your credit score is the inherit debt you are capable of managing at any one point in time. This is tied to the bills you pay, the credit cards you have, and the debt you possess. The higher your credit score, the better you are at managing any accrued debt. In the case of a small business loan however, this shows the bank or lending institution how likely are you to pay back the loan.
Think of it like a friend that borrows money from you. If you know that friend is trustworthy and likely to pay you back, then you are more inclined to give them money. The same concept applies between the institution giving the loan and the person receiving it. If you have a lower credit rating, that shows the bank that you are either less likely to be able to pay back the loan, or you create a greater risk of the bank losing money should they invest in you. On the other hand, if you have a higher credit rating, the bank knows they can trust you with a larger sum of money.
All of this plays into acquiring a small business loan. The bank will give you less money—if any at all—if you have a lower credit rating. Of course, that also means that if you have a higher credit rating they will be more inclined to grant you a loan, in general, as well as a larger sum of money at that. Don’t panic though, even if you have a low credit rating, you can have someone co-sign for the loan effectively piggybacking off of their credit rating. However, keep in mind that should you default on your loan, that person will be responsible for making the payments on it. So remember, before you go to the bank to get that money to begin becoming an entrepreneur check your credit score. This will give you a better idea of how much you can ask for and the likely hood that you may get turned down.