After setting up the basics of your small business finances, like opening a business banking account or choosing an accounting system, you may be thinking about taking out a loan. Unfortunately, most banks view small business loans as a risky investment. One way to boost your chances of securing funding is by learning what lenders will consider when reviewing your application. Lenders use the “5 Cs of credit” to measure your “creditworthiness” and your ability to repay a loan. These considerations help them gauge how good of a borrower you’ll be and whether you are a sound investment. Check out the chart below to learn more about what lenders look for and how you can strengthen your application.
The “5 Cs of Credit:”
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Your credit score is an important part of seeking any type of credit, including a loan, as part of the “character” consideration. Five factors help explain how credit agencies evaluate the information in your credit reports when calculating your personal credit score. The better your score on each of these factors, the higher your overall credit score. These five main factors include:
- Payment History (35% of score): Pay bills and debt payments on time to improve your payment history score.
- Debt Utilization (30% of score): Maintain low balances on your credit cards and lines of credit. Generally, you should not exceed using more than 25-30% of your available credit.
- Credit History/Age (15%): If you have a short credit history, you can improve your score by building credit to demonstrate responsible financial behavior.
- Credit Inquiries/New Credit Checks (10% of score): Too many applications for credit and new credit accounts can bring your score down.
- Types of Credit (10%): A mix of different types of credit accounts can help boost your score. Resource Locator Map to find lenders or business assistance providers near you that can advise you on how to build your credit.
Finally, if you are worried about your credit history, you might be tempted to take advantage of financing offered through online lenders. While some of these new players do offer options for borrowers with non-traditional credit histories, you should be wary of predatory lending practices. Some of these online lenders may hide the true terms and costs of the loan, for example charging significant fees if you try to pay some of the balance in advance. Learn more about responsible lending before you decide to work with an online lender.
Now that you know what lenders look for and the key factors in determining your credit score, get educated about your credit history.