Securing funding for your business hinges on presenting yourself as a low-risk investment. Whether seeking a small business loan from a bank or attracting investors, understanding their perspective is crucial. Banks evaluate loan applications based on risk assessment criteria, essentially determining if lending money to your business is a sound investment.
Each bank employs a unique system for loan approval. Generally, factors like a strong personal credit score, a history of at least two years in business, and a positive business credit profile significantly increase your chances. The longer you’ve been operating, the higher your credit score, and the more favorable your business credit report, the lower the perceived risk for the bank.
When applying for credit, be aware that banks have different credit score requirements and utilize reports from various credit bureaus (Equifax, Experian, and TransUnion). Each bureau calculates scores differently, resulting in three potential personal credit scores. Understanding your scores from each bureau is vital.
For example, a client was initially denied a $50,000 unsecured business line of credit after applying at two banks. We identified that her Equifax score was 633, while her Experian score was 685. Because the initial banks used Equifax, we directed her to a bank that used Experian, resulting in approval. Knowing your credit scores from each bureau allows you to strategically target lenders and significantly improve your odds of securing business funding.