Having a good business loan is one of the most important prerequisites for obtaining small business financing. If expanding your bakery business is currently in the pipeline, building a good business loan early will help you access capital on better terms and interest rates, which most new borrowers find difficult to obtain.
What is a business loan
Business credit or business credit rating is a rating that reflects the creditworthiness of the business. This is usually used by lenders to determine whether to lend to a business and at what interest rate.
Like a personal credit rating, your business credit rating is a digital representation somewhere between 0 and 100. Most lenders require a minimum business credit rating of 75; of course, the higher your score, the better your chances of being approved for funding.
To determine your business credit rating, you must request it from credit reporting agencies such as Experian, Equifax and Dun & Bradstreet. These agencies will publish your comprehensive business credit report, which includes a history of payments since you received your federal tax ID. Compared to a personal credit report, business credit reports can be viewed by the general public.
What is your business credit rating?
A business credit rating is a number that represents the creditworthiness of a business. This result is used by lenders to determine whether to grant a loan to a business or not. The higher the score, the more likely a business is to be approved for credit.
There are several different factors that go into determining a business’s credit rating.
- Payment history. Lenders will check how often and on time the business has made its payments in the past. They will also look at public records to see if there have been bankruptcies or foreclosures.
- The amount of existing debt that the business has. The more debt a business has, the greater the risk that it will not make its payments. Lenders will also look at the credit limits of the business to see how much debt they can actually take on.
- Duration of time in business operations. The longer a business exists, the more likely it is to have a good credit rating. This is because creditors believe that companies that have been around for some time are more likely to be able to make their payments on time and stay afloat financially.
Reasons for building a good business loan early
It is important to know that your business credit rating is more than just an indicator of your ability to pay bills and debts on time. This is actually an important criterion for determining the financial health and reliability of your business. Therefore, when you build your credit rating on your business early, you are able to show creditors that you are creditworthy enough to get capital when it comes time to expand your baking shop.
Here are other reasons why building a good credit rating for your business at an early stage will contribute a long way to your bakery business:
Create a remarkable credit history early.
Small companies are usually limited when they borrow money from traditional lenders such as banks because they have not been in business long enough to establish a remarkable credit history. So, if you are planning to get big soon, make sure you start building your credit now. The earlier you keep a record of your transactions, the longer your credit history will be.
Borrow money when you need it at the beginning of your business.
Most lenders would require you to work for at least three years to be approved for funding. In this case, building a good business loan early can provide you with the necessary funds much faster.
Be in a better position to negotiate deals.
Building a good business loan helps you by having the ability to negotiate better deals with suppliers. This is because providers would like to maintain relationships with customers who have a clean business credit report.
Save more money.
When you have a good business loan to show to creditors, you can achieve better terms and rates. You can also access different types of financing, such as revolving credit line or equipment financing.
A good business loan tells creditors that you are able to pay off your debts on time. It also determines how big a risk you can be. It will be used to calculate your rates and the types of small business financing you may be eligible for and how much you will qualify for.
Tips for building a good business loan
There are several different things you can do to build your business credit rating. One is to make sure you always pay your bills on time. This shows lenders that you are a responsible borrower and helps improve your payment history.
Another way to build your business credit rating is to use a business credit card responsibly. This means making timely payments and keeping your balance low. Using a business credit card can also help diversify your credit mix, which is another factor that goes into calculating your business credit rating.
Finally, keep your debt-to-income ratio low. This means that you do not have to borrow more money than you can afford to pay back. Lenders will look at this ratio to determine if you are a good loan applicant or not.
It’s never too early to start building your business credit rating. A strong business credit rating can help you get approved for loans and lines of credit, helping you fund the growth of your bakery.
About the author
Matthew Gilman is a business finance expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialized financial company providing training and financing opportunities for business owners.