When considering approval for a business loan, lenders and investors alike take into consideration the borrower’s credit risk. This is the lender’s risk of financial loss from the borrower’s failure to repay the loan. Since no one wants to lose money, the greater the assessed credit risk, the greater the cost of the loan – or the higher the interest rate.
Calculating Credit Risk
A business’ credit risk is determined by the borrower’s anticipated overall ability to repay a loan. Several factors are taken into consideration in order to obtain a complete picture:
- Credit Score – Scores typically range from 400-850. The higher the credit score, the better.
- Credit History – How you’ve operated in the past regarding your loan/debt repayments is really the best and most important indicator as to how you will function in the future. Things like late payment history, bankruptcy, foreclosure, judgments, and garnishments, all affect how the lender views the loan and dramatically increase your business credit risk.
- Revenue Generating Ability – Financiers carefully scrutinize business plans and projected forecasts to determine whether or not they think your business will generate enough revenue to make payments on the loan.
- Collateral Assets – The more assets the lender sees are available to serve as collateral is generally an indication of less risk for default.
- Employment History – Stability in the employment market is also part of the big picture for lenders. The longer you’ve been in the same business/field and “stable,” the less risky your credit.
The Numbers
No matter how sure you are that you are an honest business owner who will be successful and will be able to repay a loan, the determination all comes down to crunching the numbers. The bank is calculating the credit risk of your business loan, not you as an individual. This is nothing personal. Simply stated, the lender does not want to lose any money.
That said, if the bank calculates you or your business as a “high credit risk,” it will cost you to obtain a loan. You may still be able to secure financing, but at a higher interest rate and an overall higher price tag than a less “risky business.” Regardless, Alliance Commercial Credit Group works to provide alternative business financing for your business and we are committed to working to find a solution and the best type of business loan for you.
