When applying for a commercial loan, your credit score will majorly affect whether your application is approved. Commercial lenders view your credit score as an indicator of how likely you are to repay the loan. You’ll most need a good to excellent credit score to qualify for a commercial loan. Understanding how your credit score affects the loan decision can help you take steps to improve your score before applying.
What Is A Commercial Loan?
A commercial loan is financing for a business purpose, such as purchasing real estate, equipment, inventory, or covering operating expenses. Banks, credit unions, and online lenders offer commercial loans. The most common types are term loans, lines of credit, and SBA loans. Amounts can range from a few thousand to several million dollars.
Commercial Loans are provided to businesses and not consumers. The loan terms, qualification requirements, and rates depend on factors like the loan type, amount, purpose, and the lender. Commercial loans require extensive documentation and rigorous underwriting compared to consumer loans.
How Credit Scores Are Used In Commercial Lending
Commercial lenders analyze your personal and business credit reports and scores as part of the loan application review. They want to see that you’ve managed your personal and business finances responsibly. This gives them confidence you’ll be able to repay the loan per the terms.
While criteria vary between lenders, most have minimum credit score thresholds for approval, such as a FICO Score of 680 or higher. The higher your scores, the better your chances of approval and securing favorable loan terms. Weaker scores can lead to denial or higher rates and fees.
Your Personal Credit Scores
Even though it’s business financing, lenders evaluate your personal credit because your scores reflect how you’ve managed financial obligations in the past. FICO and VantageScore are the most used credit scoring models. Scores range from 300 to 850. You’ll need good to excellent personal scores for most commercial loans.
If you’re a small business owner, your personal scores carry the most weight. With larger companies, lenders look at the scores of key executives. Spouses may also be evaluated if they have an ownership stake or are guarantors.
Building your personal credit is wise before seeking a commercial loan. Pay all bills on time, lower balances, and correct any errors on your credit reports. You can check your latest scores for free so you know where you stand.
Business Credit Scores
Lenders also review business credit reports from Experian, Equifax, and Dun & Bradstreet. These provide an in-depth look at your company’s payment history with vendors and creditors.
The reports list the business accounts opened, the high credit amount, current status, and recent activity. Payment delinquencies or collections can negatively impact your business credit.
Credit bureaus use the report data to calculate business credit scores. Higher scores signify your business pays bills on time and handles credit responsibly.
How To Improve Credit Scores For Commercial Loan Eligibility
Given the importance of credit scores in the commercial loan process, take steps to strengthen your personal and business credit ahead of time. This will enhance your chances of getting approved and getting the loan amount and terms you want. Consider these tips:
- Pay all personal and business bills on time – being late can severely hurt scores. Set calendar reminders for due dates.
- Lower credit card balances – high balances relative to limits drag down scores. Pay down cards to 30% or less of limits.
- Limit credit applications – too many new accounts can indicate risk and depress scores. Only apply for needed credit.
- Check credit reports for errors – mistakes like closed accounts listed open can wrongly lower scores. Dispute errors with bureaus.
- Build business credit history – apply for vendor accounts, make on-time payments, and monitor credit reports.
- Ask about credit report discounts – some bureaus give breaks to new businesses for a better payment history.
- Talk to your banker – they may offer business credit cards or secured cards to establish business credit.
The Costs Of Weak Credit Scores
Having low personal or business credit scores can seriously impact your commercial loan eligibility and terms. The repercussions of weak scores include:
- Higher interest rates – lenders perceive you as a higher risk, so your loan rate will be higher. Each point over the current prime rate tacks on significant interest charges over the loan term. It also means higher monthly payments.
- Larger down payment requirements – most commercial loans require a down payment. Weaker scores mean you may need to put down 20-30% or more versus just 10-15% with very good credit. This ties up capital you could otherwise invest in your business.
- Shorter repayment term – lenders limit the loan term for riskier borrowers to lower their risk exposure. This results in higher monthly payments on a three-year loan instead of a five-year or longer term.
- More collateral or guarantees required – to offset higher perceived risk, lenders require collateral valued well above the loan amount or personal guarantees from business owners. This puts your assets at risk.
- Lower loan amounts – even if approved, lenders will limit the loan amount they’re willing to extend based on creditworthiness. You may not get enough financing to meet your business needs.
- Outright denial – the biggest consequence is not getting approved at all. Weak personal or business credit scores are among the top reasons for loan denials. You miss the chance to expand your company with commercial financing.
Poor credit means losing out on tens or hundreds of thousands of dollars over your loan’s term from higher costs and less favorable structures. Good credit is essential to gain a lender’s trust so you can secure affordable, sufficient financing to take your business where you want it to go.
Managing Credit Wisely During And After The Loan
Once approved, it’s critical to continue practicing good credit habits throughout the loan term and after you pay it off. Ongoing responsible credit management strengthens your scores further and builds a positive history with your lender for future financing needs.
- Make every loan payment on time – delinquencies or defaults can tank your credit and prompt the lender to call the loan. Set up autopay from your business checking account to avoid missed payments.
- Keep credit card balances low – high revolving balances can hurt your credit. Maintain balances under 30% of credit limits on all cards.
- Limit new debt – only take on additional borrowing sensibly. Too much new debt can raise scrutiny and jeopardize your loan. Consult your lender before applying for other financing.
- Watch account activity – monitor your personal and business credit reports regularly for any suspicious activity, errors, or signs of fraud. Address issues immediately to contain any damages.
- Communicate with your lender – if facing financial challenges, talk to your lender right away. They may allow modified terms to get through a temporary hardship. Working cooperatively with them preserves the relationship.
- Pay the loan off on schedule – avoid prepayment penalties by making principal payments as agreed. Fulfilling the loan terms demonstrates you’re a low-risk customer.
- Build more credit history – continue using vendor accounts and business credit cards. Making timely payments builds your scores and credit profile over time.
Safeguarding your personal and business credit scores has rewards that extend far beyond just getting approved for a commercial loan initially. Maintaining excellent credit means your company will have ready access to capital as it evolves and will qualify for the very best loan terms to maximize investment potential.
Conclusion
Your personal and business credit scores carry tremendous influence with commercial lenders. Good to excellent scores can be the difference between getting approved or denied and securing favorable interest rates and terms versus higher costs. Invest time upfront to understand credit
