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Three Key Factors Lenders Look at Before Giving You Business Credit

Aug 19, 2008
Many businesses fail because they are unable to access the capital that they need to survive, particularly in the first five years of establishment when banks view them as riskier because of their age. This is also when the vast majority of businesses fail. By being aware of the factors that are weighed before lending money, you can better prepare your business to successfully attain the credit needed to not just survive, but thrive. Your personal credit score and revolving debt will be an integral part of this process, but there is more involved than just your individual financial history.

Lenders will look at the risk your business's industry poses. Every industry is assigned an SIC code. This indicates a certain level of risk to the lender. Perhaps bakeries fare better in their first ten years, have relatively low operating costs, and good overall success rates, whereas hair salons have a higher failure rate and overhead costs. The bakery industry's SIC would reflect a lower risk than the salon's, and so on. This translates directly into the amount banks will lend you. The lower your industry's risk, the more credit lenders will approve you for. The variance between amounts that lenders will give a low risk business an a high risk business are not great, however. Having a very low risk SIC industry code may only gain you five additional percentage points of your annual gross sales in your credit line, meaning if the lender would provide a high risk industry with a loan equal to ten percent of their annual gross sales, a low risk business might only get a loan equal to fifteen percent of their gross annual sales. Thus, the amount is not huge, but still is significant in the final total your business will receive.

Lenders will also determine how much to lend your business based on how long it has been established. This figure will mean the amount of time in business under current management. The general standard is six months minimum, although some banks will require one year in business. These procedures vary greatly depending on the lender; however, some will give new businesses a business credit card immediately upon opening an account with them. The business line of credit, however, will usually be withheld until the business has been going for six months. New business owners should also keep in mind to request credit lines under $50,000 when applying for their first line of credit after six months, as most lenders will automatically reject any larger requests until the business is more established.

Lastly, lenders will logically want to determine if your business has been profitable. They will examine your business revenues to determine this. This makes sense on the part of the lenders, due to their need to assess risk. A business that is already succeeding is a significantly lower risk than one that is faring poorly, or is so new that they have no revenues to speak of at all. For these brand new businesses, again, it is likely that they will be required to get by with just a business credit card for the first six months. Once revenues have been established, then it is appropriate to seek out a line of credit.

There are ways around these guidelines. Exceptions are known to have been made for those with extremely strong personal credit scores, very low revolving debt, and a number of other factors that must fall into place favorably. For the vast majority of business owners, however, it will be a combination of personal fiscal history, these three factors, and the required waiting period until they are able to access the larger credit lines their business needs.
About the Author
Scott Letourneau is the CEO of Fast Business Credit, Inc. and has a valuable free guide to help business owners get access to capital plus a new program to help business owners understand business credit! Go to our Business Credit Program page for powerful details!
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