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Grow Your Business Finances

Beyond Credit Scores: 5 Factors Business Lenders Consider

Beyond Credit Scores: 5 Factors Business Lenders Consider
Credit: Singkham/Shutterstock

When consumers apply for credit cards or loans, their credit scores are often the single most important factors in deciding whether their applications are approved. But what about when you're applying for a business loan?

While business lenders will certainly take your personal credit into consideration, it's far from the only factor they will consider. Ted Peters, chairman and CEO of the Bluestone Financial Institutions Fund, outlined what is known as the five "C's of credit" that commercial lenders look at to make a credit decision.

Cash flow. Lenders look at your historical and projected cash flow, as well as your sales numbers, to determine your ability to pay them back in a timely manner.

Collateral. Depending on the strength of your cash flow, banks may look at your current assets — mortgage, working capital, inventory, etc. — to see if anything can be used as collateral to secure your loan, should you have trouble paying it back. [First Small Business Loan? 7 Things to Consider]

(Business) Credit. In addition to your personal credit and payment history, lenders will check if your business entity has established any past credit, including on-time bill payment for any B2B services. Many lenders use reports from business data company Dun & Bradstreet to access this information, Peters said.

Character. Your overall character and reputation in the community matter to the people taking responsibility for funding your business. This is part of the reason lenders will set up an in-person meeting to discuss your application and credit needs.

"Lenders meet with people [to] look them in the eye [and determine], 'Is this someone we trust and want to do business with?'" Peters said.

Capacity. Peters noted that this is typically the least important factor in a credit decision, but lenders still want to know the capacity your business has to grow. A local ice cream franchise, for instance, has a limited capacity to boost sales, but a global e-commerce or tech business could grow exponentially in just a few short years.

Editor's Note: Looking for information on business loans? Use the questionnaire below, and you will be contacted by alternative lenders ready to discuss your loan needs.

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Although it's not yet a publicly available product, the team at Experian's research and development branch, DataLabs, has been hard at work over the last three years looking at the correlation between social media and commercial credit risk. In the not-too-distant future, DataLabs' solution may allow lenders to factor data from a business' social media channels into a credit decision.

"Breakthrough experimentation in Experian DataLabs has uncovered that social media has predictive value in assessing the credit risk of a business," said Eric Haller, executive vice president of DataLabs. "While not being productized for lenders to use today, the future may hold that business reviews, likes and check-ins can all help to paint the picture of a successful and growing business."

Haller said that DataLabs aligned data from businesses' accounts on Facebook, Twitter, Foursquare, Yelp and other major social platforms with those companies' commercial credit data. The results showed that certain social trends can help predict a credit default.

"The strongest value is for businesses that have not established credit in the past," Haller told Business News Daily. "This is significant because one-third of all inquiries for commercial [lending] are businesses [without] established credit."

If you're looking to take out a traditional bank or SBA loan, Peters advised meeting with two or three different lenders before making a decision, so you can fully understand your options.

"Not all banks look at everything the same," Peters said. "Some won't do a restaurant loan, for example. It's a good idea to talk to multiple banks, as [they may have] different preferences."

He said interested borrowers should also put together a "package" for potential lenders. This package should minimally include an executive summary of your business, your business plan, financial information, how much you want to borrow and what you intend to do with the money.

"There's no set rule [about it], but make sure it's well-organized, clear, up-to-date and done neatly," Peters said. "It's going to be one of your first impressions at the bank."

Ready to apply for a business loan? Check out Business News Daily's best alternative small business loan picks and our guide to choosing the right small business loan.

Editor's Note: Looking for information on business loans? Use the questionnaire below, and you will be contacted by alternative lenders ready to discuss your loan needs.

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Nicole Fallon

Nicole received her Bachelor's degree in Media, Culture and Communication from New York University. She began freelancing for Business News Daily in 2010 and joined the team as a staff writer three years later. Nicole served as the site's managing editor until January 2018, and briefly ran Business.com's copy and production team. Follow her on Twitter.