A study released Wednesday by the Small Business Administration Office of Advocacy supports that the recent existence of business credit scoring has been largely beneficial to businesses, giving banks and other lenders a clearer picture of the financial standing of businesses they are considering lending to.
While personal credit has been around for a long time, business credit and the idea of business credit scoring has only existed for the last 20 years. Though a loan officer may still consider personal credit in the process of granting a loan, the importance of business credit cannot be overstated.
There are a couple of ways that having strong business credit can help small businesses seeking access to capital. Firstly, it builds a business’s confidence. The study demonstrates that businesses that know they have a strong credit score feel more confident when trying to qualify for loans, whereas businesses who have poor business credit or don’t understand what business credit is are less likely to apply for loans even when they need them.
Most importantly, businesses with strong business credit are more likely to receive loans once they apply. Often times, being denied for a loan is the catalyst for business owners to start seeking solutions to build and monitor their business credit. To put it simply, lenders want to know they are going to get their money back on time. A business owner’s character and professionalism certainly can’t hurt, but a business’s credit profile—which details things like payment history and likelihood that a business will fail in the next 12 months—is comprised of hard facts and will go a lot farther to lending a business credibility.
Beyond just demonstrating the importance of business credit, the study elaborated on the importance of having a long-standing relationship with a lender. Businesses who have relationships with lenders are more likely feel encouraged to apply for loans in the first place—and get them.
So what does this mean for you as a business owner? Though business credit is crucial in securing loans and lower interest rates and premiums, it doesn’t mean your business is doomed if you have poor business credit. There are many ways your business can gain access to capital, including alternative lenders, community development financial institutions, and more. There are also a variety of ways you can start building and monitoring your business credit today, so check out dandb.com to learn about our credibility solutions.