If you are planning on starting a business, or running one already, you know that you may need extra money to start up or expand. That is where having credit comes in. Credit is basically where a bank, a credit card company or some lending institution (or person) gives you money with the promise that you will pay it back with a fixed interest rate.
The factors that creditors look for are similar and they boil down to the following (thanks to the Federal Government and the Consumer Handbook for Credit Protection Laws for the source of this information):
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“What Creditors Look For
The Three Cs. Creditors look for an ability to repay debt and a willingness to do so–and sometimes for a little extra security to protect their loans. They speak of the three Cs of credit: capacity, character, and collateral.
Capacity. Can you repay the debt? Creditors ask for employment information: your occupation, how long you’ve worked, and how much you earn. They also want to know your expenses: how many dependents you have, whether you pay alimony or child support, and the amount of your other obligations.
Character. Will you repay the debt? Creditors will look at your credit history (see section on Credit Histories and Records): how much you owe, how often you borrow, whether you pay bills on time, and whether you live within your means. They also look for signs of stability: how long you’ve lived at your present address, whether you own or rent your home, and the length of your present employment.
Collateral. Is the creditor fully protected if you fail to repay? Creditors want to know what you may have that could be used to back up or secure your loan and other resources you have for repaying debt other than income, such as savings, investments, or property.
Creditors use different combinations of these facts to reach their decisions. Some set unusually high standards; others simply do not make certain kinds of loans. Creditors also use different rating systems. Some rely strictly on their own instinct and experience. Others use a “credit-scoring” or statistical system to predict whether you’re a good credit risk. They assign a certain number of points to each of the various characteristics that have proved to be reliable signs that a borrower will repay. Then they rate you on this scale.
Different creditors may reach different conclusions based on the same set of facts. One may find you an acceptable risk, whereas another may deny you a loan.”
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Basically, you need to have your financial act together when you are applying for credit. The consumer handbook offers information and the protections that are out there but you need to show that you can be trusted with other people’s money.
The weird thing is that the more you can be trusted and the more that you don’t need the money, the more that the financial institutions will try to loan you – or at least that was the case prior to the meltdown in the housing markets.
It is also a good idea to watch how much credit you need and read very carefully what the terms are of the lines of credit, the loans, etc. You need to know what would happen if they call the loan due immediately. You need to know when and where to go into your credit.
If you are starting a business, make sure that you have this in your business plan. If you are already in business, make sure that you research carefully what you will need to have.
Kim Greenblatt
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