How Does Business Credit Affect Lending Decisions?

This article is an excerpt from Credibly Business Journal, Volume 2: Business Credit Scores, brought to you by Credibly and Experian. Download it free right here.

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According to a 2015 report by Nav, small business owners who understand their business credit score are 41% more likely to be accepted when they apply for a business loan.[1]

When you apply for financing for your business, lenders review your credit history to determine whether or not to fund a loan or line of credit, as well as the interest rates and repayment terms if a loan is extended. Consumers and businesses with good credit often qualify for loans with lower interest rates and better payment terms than those with poor credit[2].

Strong business credit won’t guarantee that you’ll be approved for a loan, but it does improve your chances. So what are lenders looking for, specifically? Knowing the five C’s of credit will help you be better prepared when you’re looking for a business loan.

  1. Character. This refers to measures of stability: How long have you lived at your current address? How long have you been in your current job or been in business for yourself? Do you have a good record of paying your bills? Your business credit score is very important when lenders look at how trustworthy you are to repay the debt.
  2. Capacity. Do you have the capacity to take on additional debt at this time? Lenders evaluate your debt-to-income ratio, looking at how much you owe compared to how much you earn. The lower your ratio, the more confident creditors will be in their ability to lend you the money and for you to be able to pay it back.
  3. Capital. This is your net worth — the value of your assets minus your liabilities, or how much you own versus how much you owe. Any institution that is looking to lend money wants those ratios to be healthy.
  4. Collateral. Any asset you have that could be used to secure a loan is considered collateral. So if you’re working with a lender that doesn’t offer unsecured loans or might be looking for a secondary source of repayment if they need it, then having assets available to use as collateral is an advantage.
  5. Conditions. These are the outside circumstances that might affect your ability to repay. Some of the conditions lenders will look at will be what’s happening in the local economy, government regulations that could affect your industry, and the competition in your market.

While some lenders use all five of the aspects of the five Cs of credit, some may not. Many lenders develop their own loan decision scorecards. Still, most lenders will use some variation of the five C’s, so understanding them is very important as you continue to build your business credit.

Related: How Is Your Business Credit Score Different From Your Personal Credit Score?

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[1] The same report revealed that 45% of small business owners don’t even know they have a business credit score, and 23% of small business owners who were turned down for financing didn’t know why their application was declined — further highlighting the need for greater education around business credit decisions.

[2] Businesses with “thin” credit reports — showing little or no credit activity — are also less attractive to lenders.