We don’t have to tell you that a good credit score is crucial to business success. Since the financial crash of 2008, banks have significantly tightened their lending criteria, meaning that small businesses with marginal or poor credit scores are finding it increasingly difficult to access the finance they need. Even if banks are willing to play ball, a solid but not outstanding score will mean you end up being charged more interest, so it’s definitely to your benefit to achieve the highest credit score possible – and the magic number is 700 or above.
How a 700 credit score can give you a bank loan.
As already stated, banks have been playing it safe for the best part of a decade now. Once the first resort for almost any business wanting finance, they’ve transformed into institutions where the computer, quite literally, says no. Even if they’re willing to consider you, they will probably want to see plenty of paperwork – articles of incorporation, profit and loss accounts, balance sheet, tax returns, even a detailed business plan – before reaching a decision, which is one reason many businesses are turning to alternative lenders, who have different acceptance criteria.
However, there are clear advantages to borrowing from your bank, if your credit score enables it. For a start, you will have your personal and business finances in one place, which will help to make life easy. Secondly, banks may charge lower rates of interest than alternative lenders, particularly for secured borrowing, meaning that you can make smaller monthly payments and save some cash in the long term.
How a 700 credit score can give you access to alternative finance.
Whilst alternative lenders place less emphasis on your credit score (not to mention your paperwork), it’s still a factor they will consider for certain types of finance. The traditional image of an alternative lender is of an innovative company offering solutions for riskier businesses at higher interest rates, but they will still provide the best deals to companies who offer the best chance of repayment without problems.
How a 700 credit score can give you better terms.
Having a credit score of 700 plus also gives you the widest choice of loans and the most advantageous interest rates and terms. In short, it demonstrates that you’re a good risk as a borrower and have a proven record of acting responsibly. In today’s constrained market, it’s your passport to acceptance and will open doors wherever you go. This flexibility can make all the difference when you’re running a relatively new business and experiencing a few problems with cash flow.
How a 700 credit score can give you a good credit card.
When applications for business loans are proving frustrating, many small business owners turn to a credit card instead. Once again, those with a credit score of over 700 qualify for the best deals, including the lowest interest rates. In fact, data shows that borrowers with excellent credit scores of 720 or above can expect an average interest rate of 13.66%, whilst those with comparatively bad credit can expect to pay a hefty 18.76%. Borrow a substantial sum and repay it over a number of years, and this difference can add up to a huge sum of money – money that could otherwise be invested in growing your business.
So what adds up to a 700 credit score?
At this stage, you’re probably wondering how credit scores are calculated and what you would need to do to achieve a score of 700 or more. In fact, there’s no great mystery and credit rating agencies are pretty open about their methodology.
The first and most important criterion – representing around a third of your score – is your payment history. If you have a record of paying late – or worse, defaulting altogether – your credit score will plummet and you will find it extremely difficult to access further borrowing.
Secondly, and only slightly less importantly, the agency will examine the amount of debt you have outstanding. In simple terms, the greater your debt, the lower your credit score. But the most important factor isn’t the amount you owe – it’s that amount compared to your borrowing limits, otherwise known as “utilisation”. In other words, if you’re using your overdraft to the utmost and have maxed out all your credit cards, that’s a clear indication that you may be borrowing irresponsibly or may be in pretty dire financial straits.
Next, the agency will look at the length of your credit history. In simple terms, the longer you’ve been borrowing, the better, as it establishes a pattern of (hopefully good) behaviour. Clearly, this discriminates against start-ups and young businesses, and in these cases, the credit histories of the principals can be taken into account.
Finally, the agency will examine the types of credit you are using and credit you are currently seeking. Businesses with access to multiple sources of finance gain a higher credit score, though not of course if they are all used to the maximum. Similarly, the agency will examine your current behaviour – have you recently taken out lots of borrowing or made numerous applications for credit (whether successful or not)? This could indicate that you are running into funding problems, suggesting you may not be able to meet your commitments on time and in full.
What happens if you can’t reach a 700 credit score?
If you can’t reach the credit score you need to secure a bank loan, you should talk to alternative lenders. Applying different criteria that are less reliant on your credit history, they could allow you to borrow against the value of your premises, plant or equipment, or take out invoice factoring or discounting: an innovative solution enabling you to borrow against the value of your invoices as soon as you issue them, with repayment being made when your customers pay you. In other words, even when your credit score is a problem, there may well be a solution.
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