How do business credit card issuers define a creditworthy applicant?
Without having a greater knowledge of the credit card approval process, small business owners will continue to make the mistake of submitting multiple credit applications in the hopes of getting an approval.
Multiple Applications Are a Bad Idea
What many fail to realize is a recent barrage of excessive inquiries will trigger a red flag with creditors. This leads to automatic turndowns and delays your chances for getting an approval any time soon.
The good news is you can easily avoid the hit-or-miss approach when you have a greater knowledge of what creditors consider creditworthy.
So from this point forward before you apply for a business credit card, first determine what strengths and weaknesses your company brings to the table.
Once you make an honest assessment you’ll have a better idea what types of credit cards your company should be able to qualify for.
The 5 Factors That Can Kill a Credit Application
Here are five major factors credit card issuers use to evaluate the creditworthiness of an applicant:
- Legal Structure – Creditors know that certain structures carry a much higher risk compared to others. For example, sole proprietorships and partnerships are the easiest structures to create but have a great deal of risk that come along with them. A corporation or LLC is considered a “safe” structure because it offers protection for their owners and is treated as a separate entity with its own tax registration.
- Company Revenues – While this information does not help card issuers determine whether a business will repay it does indicate its ability to pay. More importantly, the revenues that an applicant provides on a credit application will be compared with the actual financials that show up on the company’s credit report. Any discrepancies will trigger red flags and lead to a credit denial.
- Age of Business – Many card issuers will scrutinize or deny newly formed businesses, especially during these tough economic times. The greater the age of your business the less risk creditors see and more the more stable your business appears to be. However, if you have other strong factors that outweigh this risk, such as strong personal credit scores, then it plays less of a factor in the credit granting process.
- Business Credit Reports –Banks will conduct a credit check on your company with a business credit bureau like Dun and Bradstreet. This is one of the major risk assessment tools used because it shows how your company handles its financial obligations with banks, suppliers, and finance companies. It also shows whether or not your company has any type of public records such as tax liens, bankruptcies, and judgments.
- Personal Credit Scores – As you know, good credit scores are key indicators of how well an individual manages his or her financial responsibilities. When you provide a personal guarantee on a business credit application you are basically becoming a co-signer. This makes you contractually responsible for any debts your business incurs. While this can expedite the approval process faster, it does come at a price.
Don’t make the mistake of having to rely on your personal credit to finance the growth of your business. Make it a point to start establishing credit in your company’s name as soon as possible.
Keep in mind: If your company has a thin file or no file listed with the business credit bureaus, then your personal credit will definitely play a much greater role in the credit approval process.
Creditworthiness for a business all starts with establishing a “safe” legal structure, strong business credit files, favorable bank ratings, and healthy financials.
Marco is founder of the Business Credit Insiders Circle, a step-by-step business credit building system providing fleet credit cards, vendor lines of credit, business credit cards, merchant lines of credit, and funding sources. You may contact Marco directly at: marco@businesscreditblogger.com. Follow Marco on Twitter @MarcoCarbajo and read more of his insights on establishing business credit.
