A low credit score can impair a business’s growth

Most of you would be aware that low credit score has the potential to make credit expensive and even lead to non-availability of loans and other credit facilities. You are probably also aware, of a personal bureau report being different from commercial bureau reports. However, as against this factual difference, personal reports do impact the outcome of business loans as well. Especially when loans are sought by small and medium enterprises. The truth remains that the impaired personal credit history or a low credit score can become a stumbling block in the growth of business.
The business will need funding at all stages. Credit is required right from the start-up stage to growth phases of different magnitude. When people set out on entrepreneurial journey, they may be under the assumption that the business and they are two different entities. But for the lending institution actually both are unanimous. If either of them shows a sign of stress on repayment, the outcome of business can swing in the wrong direction. Truth remains that a financial stress on personal front will affect the enterprise’s finances and vice-versa. That is why personal credit score will have a bearing on business loan applications as well.
Now that we understand the reasons as to why the personal credit score will impact the underwriting decision of a business loan, let us dwell further into the details.
Impact on margins and profits
A low personal credit score score can lead to unfavorable terms on the loan. A higher rate of interest would mean the cost of funds will increase and thus will have a negative impact on margins.
But why should a lower credit score result in getting a higher interest rate or a higher fee being charged. One may ask if the entity and the owner are worthwhile, why should the terms be different from others. Let us understand this from a lending institution’s point of view. The rate of interest is directly proportionate to the risk that is associated with the loan. To clarify even simpler terms: different loan products attract different rates of interest. A home loan and a gold loan come at a much cheaper rate than a personal loan. Both home and gold loan are secured with a collateral, while the personal loan is pure cash with no collateral to fall back upon in the eventuality of a default, hence the rates of interest varies.
Losing out on opportunities
Business is about opportunities. One single deal has the potential to make or break the business. Suppose one is into trading and to be able to materialise a deal that can add to lot of value both in terms of scale and profits, he is needed to invest an amount that requires fund raise. However, on account of the poor personal credit profile, the loan application of business gets declined. The business suffers loss due to losing out on the opportunity.
There are scores of people who want to embark on the entrepreneurial path. The dream of becoming a job creator rather than being in one may just not flag off on account of impaired credit history, in case there is a requirement of funds right at the outset of business.
Hence it becomes highly important to maintaining a good credit score. Unavailability of credit can severely impair the growth prospects of the business.