A personal credit score is a numerical expression of a person’s creditworthiness – the likelihood that the individual will pay as agreed. A good credit score is called an excellent credit score, maybe 700 or higher. A business loan is typically secured against an asset just like a mortgage loan. It will have a higher interest rate than unsecured loans like an overdraft or payday loan. The interest rate of the loan is based on the credit status of the borrower. A good credit score can help with a small business loan in Mississauga because it gives an entity an expectation of financial stability and predictability.
A business loan is secured against an asset because the lender expects to get back more than the amount of the loan if it happens to be repaid on time. This collateral is used as a form of “guarantee” that the loan will be repaid and covers late payments and missed payments. A good credit score helps with a business loan because it shows that you have financial stability and predictability. Because a business loan is collateralized, it is expected to pay back the loan plus interest on time. Still, if it does not, the lender will get this collateral back from you.
How to Get a Good Credit Score for a Business Loan
There are many ways to get a good credit score for a small business loan.
- Make sure you have at least two types of accounts open. Not only do they help with your credit score, but they also show lenders that you can be responsible for multiple lines of credit. Having only one type of account will negatively impact your credit score. For example, suppose you only have a “credit card” as a line of credit. In that case, this is not enough to show financial stability.
- Do not close your accounts too soon. Having many credit lines open shows lenders that you can handle multiple sources of credit. The accounts are generally closed after seven years, but you should keep them open as long as possible to show financial stability. They will then be closed and removed from your credit score.
- Make regular payments on time and use more than 30% of your available credit. This is considered an excellent practice, and it shows lenders that you can pay back the loan based on the available credit line. This will help with getting a good credit score for a business loan.
- Do not close your accounts before the seven years is over. It typically takes seven years for the accounts to be removed from the credit score. If it is closed early, lenders will think that you cannot handle various sources of debt, which negatively affects the credit score.
- Check your credit report regularly. The Fair Credit Reporting Act (FCRA) requires that credit reporting companies provide consumers with one free credit report per year. This allows you to see what is on your credit report and correct any errors.
- Inform the lenders of the accounts that you have closed to change their reports accordingly. They may still show on your credit report for a certain amount of time after closing, negatively impacting the score.
- Make sure all accounts are closed promptly. If any accounts are opened after your request, it will negatively impact your credit score.
Requirements for a Good Credit Score
For a good credit score to be obtained, the following is required:
- Payment history – Indicates how you handle credit and repayment. [Credit score ranges from 300-850 based on this.]
- Equipment secured loans – This shows that you have a reliable income source and can pay off the loan. [Credit score ranges from 300-850 based on this. Not used for unsecured loans.]
- Lines of credit – This shows that you can manage multiple types of credit. [Credit score ranges from 300-850 based on this.]
A good credit score will show lenders that you are financially stable and will most likely make payments on a loan. Depending on your business, the amount needed for a business loan may vary. A good credit score helps get a loan based on the specific criteria of the lender taking on the risk.
Types of Loan Rates
The following are the different types of loan rates and how they are determined:
- Fixed Rate – Predictable interest rate on a loan that does not change after the loan is secured. [Example: Loan for two years at minimum payment, $25,000. If you were to pay the minimum amount per month ($1,333.33) in two years, you would make approximately $28,000.]
- Variable Rate – Interest rate can change with market volatility and may fluctuate based on your credit score and borrowed amount. [Example: Loan for two years at minimum payment, $25,000. If you were to pay the minimum amount per month ($1,333.33) in two years, you would make approximately $27,000.]
Get the Financial Help You Need
All businesses have slow and busy seasons and may require financial help whenever things are down to prevent bankruptcy. As such, if you’re a startup looking for the finances to give you a boost or advice from experienced specialists, reach out to E2E Financial Solutions.