Personal Credit & a Lenders Decision for a Business Loan

Dear M & M: Is my personal credit history a part of a lenders decision on getting a loan for my business? – Angel

Dear Angel:

Because it is assumed you run the business generally your personal credit history and your business credit history are linked. Most lenders use the seven C’s when qualifying a candidate for a loan. The most often looked at C is Character. This most always refers to the person who is asking for the loan or anyone guaranteeing the loan.

Most definitions of Character refer to the moral qualities of an individual. I have heard many lenders say, “If a person is behind on their own child support what makes me think they are going to pay me back when things get tough?” A second C is called Commitment.

This refers to your ability and willingness to guaranteeing the debt even if the business fails. I could see a lender looking at a person’s credit score and think; they don’t seem to care or are committed to paying back what they borrow, why should I care or even bother to become another person on the list trying to get their money back.

Many times I’ve seen lenders stretch or even bend some guidelines to make a loan to someone with high credit scores thinking, they always pay their obligations, why wouldn’t they pay me? A third C in this is Credit. Problems must be explained, a person’s credit score is a numerical value assigned to a person on the history of how they handled debt.

Another C looked at is Capacity. This refers to the business itself. Keeping that in mind, as the owner of this business Capacity can certainly be linked directly to you. Does the business have the Capacity to support itself and pay its obligations? Can the business or you take on more debt?

Conditions are also another one of the seven C’s. Conditions include several things from the market you are operating in, lifecycle of the business, economic trends or anything else that might affect your business. Notice the general term or “anything else”. I am sure everyone can come up with something personal that could apply to this Conditions category that would apply to us all.

Capital is another one of the seven C’s. How much money are you willing to put up as your part of the bargain if you can’t make the payments? The accumulation of Capital or equity to enable you to qualify for the loan or to put something up called Collateral is the last of the seven C’s.

Collateral is often referred to as the value of the asset to secure the loan. In summary, Character, Commitment, Credit, Capacity, Conditions, Capital and Collateral are all part of your personal history. How a person has behaved in the past is usually a good indicator on how a person will act going forward sometime in the future. The seven C’s are many times are a personal account of each of us.

-M&M

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