Small and big banks, institutional and alternative lenders, and credit unions have been approving more small business loans in the past couple of years.
However, your credit score will greatly determine the terms on which you will be getting the loan, this according to a new report by Fundera. This can mean getting up to 20 times more funding if you have a creditworthy business.
The report called “Good Credit vs. Bad Credit: The Big Business Loan Divide” looks at original data from Fundera along with information from the U.S. Small Business Administration. Fundera then compared loan terms, loan amount, interest rates, and repayment schedule to determine business owners with the most and least creditworthiness.
For small businesses, credit scores carry huge implications. Priyanka Prakash, who wrote the report for Fundera says, “It can mean the difference between getting the money you need to grow your business and receiving a rejection letter.”
She goes on to say, “But it’s more important than that. It can mean a difference of thousands of dollars in initial access and thousands of dollars to your bottom line.” For businesses with less than stellar credit scores, this comes out to tens of thousands of dollars.
The Benefits of Good Business Credit
There are two glaring disparities between creditworthy and least creditworthy borrowers in the report.
The first one is the amount which creditworthy businesses can get compared to their counterparts. The report says creditworthy borrowers get an average loan amount of $423,129, and it goes all the way down to $20,250 for those with the least creditworthy businesses.
When it comes to the interest rate, the numbers are even more dramatic. The average creditworthy borrower received an interest rate of 7.27% and their counterparts were assessed an interest rate of a whopping 67.88%.
In order to appreciate this difference and impact the interest rates have on a business, Fundera shows just how much each side would pay for a three-year $100,000 loan.
The business getting 7.27% interest rate would pay the lender a total of $111,603, meaning the loan would cost this business $11,603.
On the other hand, the business with the 67.88% interest rate would pay $136,227 just for the loan, which brings the grand total to $236,227.
The length of repayment is also just as bad if a business is not creditworthy. While the creditworthy business gets an average repayment term of 16 years, those who aren’t creditworthy average just eight months to repay their loan.
The less creditworthy businesses also have to contend with weekly or daily payment frequency in order to meet the terms of the loan.
What this means for the less creditworthy businesses is they will need strong cash flow in order to stay afloat and make the payments. As Fundera points out, 82% of business failures can be attributed to cash flow problems.
Improving Your Business Credit
The good news is you can improve your business credit.
According to Fundera, which specializes in helping small businesses identify the best-fit for financial products, improving your credit by 50 to 100 points might mean delaying your search for financing by a few months.
It goes on to say the payoff will definitely be worth it. As the report points out, these are tens of thousands of dollars which you can best use to grow your business instead of paying a lender in interest rates.
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