The business credit qualifications include the basic set of business activities that are the backbone of any business. These include the sale of products, provision of services, finance and accounting. It is the business credit qualifications that will give the creditworthiness of the business a major boost, as this will determine the interest the lender will extend to the business. As such, the business needs to maintain its business credit qualifications intact so that it does not get denied of business loans when applying for finance. For this purpose, a business needs to have sound business credit qualifications.
In the past, the business credit qualifications consisted of a personal guarantee with assets or properties that could be used as collateral. This means that the business would pledge its assets to the lender in the event that the loan is not repaid. The current business credit qualifications comprise different techniques that ensure a business maintains its business credit qualifications. It is for this reason that there are different techniques that are used to evaluate business credit.
The evaluation of business credit involves two main techniques which are the business credit risk score and the credit profitability score. The business credit risk score is basically a way of modeling the probable losses that would occur in case the business does not repay the loan in time. This score is designed to allow a business to assess the financial risks it may encounter in the future and therefore help it come up with a business credit qualification that is optimal.
Meanwhile, the credit profitability is a technique that determines the profitability of a business. Here, the lenders will consider how much a business can generate in profit in contrast to the amount it borrows for its business credit qualifications. Thus, the more the profits of a business, the higher the amount of its loan. The business credit qualifications should therefore be in tune with the level of profit generation of a business. This means that the business credit qualifications should be high enough to encourage lenders to extend the loan. However, it also means that if a business falls short of profits for three consecutive months, it may lose its business credit qualifications and have to look for new lenders.
Another factor that affects business credit qualification is the amount of credit extended to businesses. Lenders usually extend loans to businesses that show potential to profit in the future. Thus, businesses with a solid credit history will normally qualify for better business credit qualifications. On the other hand, those with poor credit histories will be considered lower risk businesses and given lower business credit qualifications. A good business credit qualification involves a combination of a good credit history and sufficient revenue so that lenders feel comfortable offering loans.
However, business credit qualifications can also be affected by the market conditions. For example, if the demand for business credit is low, a business may qualify for a business credit facility even without meeting the lending . . . . . . criteria. On the contrary, a business that is experiencing strong growth and taking advantage of competitive business situations may need to meet a higher number of credit criteria before it qualifies for business credit. This will depend on the lender and the situation.
Another aspect of business credit qualification is the level of risk a business poses to a potential lender. In general, businesses with fewer risks will enjoy more business credit facilities. Thus, a business that has a low risk will probably qualify for a business credit facility at better rates. To put it simply, a business that is less at risk of non-payment will receive better rates on its borrowing.
Finally, business credit qualifications are also influenced by the type of lending a business is able to avail of. Most businesses are eligible for small business credit, while others may require special business credit qualifications. Usually, smaller businesses are able to access business credit through personal credit lines. Lenders also give business credit to businesses that adopt self-enclosure, take out a loan against property or securities, or enter into securitization of their assets. Finally, business credit is given more weightage in corporate borrowing because small businesses are less reliable in default.