If you are planning to start a business, but you are worried about your low credit score, the good news is that you can still apply for a commercial loan to fund your undertaking. But, there is no guarantee of approval.
However, to minimise the chance of commercial finance providers rejecting your applications outright and improve your chances of getting approved, you can actually apply some remedies.
How Do Lenders Assess Commercial Loans?
When it comes to business loans, which are similar to commercial loans, lenders tend to be less stringent, compared to personal loans. The reason is that the National Consumer Credit Protection Act does not regulate their activities.
The lenders have their distinct rating system, which means that they will assess each application according to whether it is high-risk or low-risk. For simplicity, you can visualise the low-risk as Rated A and the highest risk as Rated D.
But that is not only the factor. Each lender has a grading system that ranges from 1-15 items. Several factors come into play, such as how long you have been in business, how your business is performing, potential profitability, and other ratios. For example, lenders see a newly launched business as riskier compared to an established company. Another factor is the industry in which you operate. Lenders would be more conservative when lending to industries, such as construction, mining, and housing.
How to Improve Chances of Approval
- A guarantor or collateral will drastically improve your chances of being approved. The lender will be more confident in releasing the money to you because they know it will be repaid. You can use a building, land, or residential housing unit as collateral to convince the lender, into lending you money.
- Another way is to write a clear business plan. The lender will require you to submit your documents so that they can assess the feasibility and viability of your business. They would want to know how you can surmount the challenges that led you to have a low credit rating in the first place. The business plan should answer the lingering questions that may nag at the lender.
- Check your credit score. Improving your credit score is time-consuming, but it will benefit you in the long term. To improve your score, make sure you pay your bills within the set time, keep track of all the bills, and settle credit card bills and other high-interest facilities.
Finally, you can ask the lender for steps on how to improve your chances. You would be surprised to know that they are willing to help you clean up your finances and prepare requirements to make it easier for the borrower.
How Much Can You Borrow?
On average, the minimum amount of commercial loan is $250,000. It would be more than enough to open a small business.
But some commercial finance providers can lend from $500,000 to as much as $7.5 million. You can apply for a commercial property loan for first and second mortgages. You can also expect an establishment fee, amounting to 2.2 per cent that will be deducted from the amount.
Once approved, the release of the money is quite fast, especially if the commercial lender has a sizable funding source.